What is a unit trust?

learn-financeA unit trust (also known as a collective investment scheme) is a pool of money managed collectively by a fund manager. You invest in a unit trust by buying units in a trust. Your money will be pooled with that of other investors and invested in a portfolio of assets to achieve the investment objective of the unit trust.

When a unit trust is first launched for sale, the price of each unit is usually fixed. If you invest in an existing unit trust, the price of each unit will be based on the market value of the underlying assets that the unit trust has invested in. The number of units you will receive depends on the amount of your investment less the sales charge you have to pay.

What are the benefits of investing in a unit trust?

Professional Management

Unit trusts are managed by professional fund managers with expertise and experience in investments. They will monitor your investments on a day-to-day basis, and make decisions based on research and analytical tools that you may not have access to.

More Investment Opportunities

By investing in a unit trust, you are pooling your money with that of other investors. As such, the fund manager is able to invest in a wider range of assets. Some assets such as bonds require a minimum investment of around $100,000, which may be difficult for individuals to access directly.

You will also be able to tap overseas markets with less hassle, and as the size of the assets under management is large, you will benefit from lower transaction costs.

Diversification

As a unit trust invests in a wider range of assets, you can better spread your risks. This means that poor performance of any one asset in the unit trust is not likely to have a major adverse impact on your investment
as a whole.

What are the drawbacks of investing in a unit trust?

No control over individual investments purchased by the fund

By investing in a unit trust, you give up control over the choice of individual bonds, shares and other assets that go into the fund, as the fund manager will make these decisions for you.

Fees and Charges

You would usually have to pay a one-time initial sales charge (sometimes known as a “front-end load”) when you buy a unit trust. There may be other costs, such as trustee fees, management fees and redemption fees (fees charged when you sell your units in the fund).

Risks

Just like any other investment, there is always an element of risk investing in unit trusts. Although investing in unit trusts helps to diversify some of your risks, it does not eliminate all risks entirely. As such, be prepared for fluctuations in the market price of your unit trust.

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