With the market filled with so many different kinds of financial products and derivatives, it can be extremely overwhelming for a beginner investor to start investing. It is however, unwise to start investing before having a understanding on what these financial products are and how do you invest in them. I am therefore, starting a new mini series called the Beginner Investor Series, which is meant to educate beginner investors like myself on the different financial products and also on how to invest in them. The first financial product that I will be looking at, will be Unit Trust. In this four part series about unit trust, I will attempt to answer questions such as “How do I invest in unit trust?” and “How do I choose which unit trust to invest in?” However, before we can begin to answer those questions, we will first need to know what a unit trust is and why do people choose to invest in unit trust.
What is a Unit Trust?
By definition, a Unit Trust is a pool of money managed collectively by a fund manager. When you invest in a unit trust, your money will be pooled together with that of other investors and invested in a portfolio of assets to achieve the investment objectives of the unit trust which is set beforehand by the fund manager.
Different unit trusts managed by different fund managers will have different investment objectives and will invest in different kinds of assets. For example, some unit trusts focus on certain assets classes such as bonds, equities or financial derivatives while others focus on certain geographical regions or industry sectors. Besides differing investment objectives, unit trusts can also differ in their investment strategies. Even if two unit trusts have the same investment objectives, they might not have the same investment strategies. Some fund managers might choose to invest in companies with growth potential while others might choose to invest in companies that have good value.
The term ‘Unit Trust’ is derived from two important characteristics of unit trust. Firstly, the ‘unit’ is from the fact that when you invest in a unit trust, you are actually buying units from the trust. The ‘trust’ is from the trust structure which unit trust adopts. Unit trusts are established by a trust deed, which is a legal document that contains information about the investment objectives of the unit trust and also the responsibilities of the fund manager and trustee. The trustee is an entity that is independent of the fund manager and its role is to ensure that the fund manager managed the unit trust according to the guidelines stated in the trust deed. It is essential for there to be a trustee to watch over the fund manager so as to reduce the risk of mismanagement of the fund assets by the fund manager.
Advantages of Unit Trust
Now that we know what a unit trust is, the next question to ask is, “Why will people want to invest in unit trust?” or more simply, “What are the advantages of investing in unit trust?”.
Unit trusts are managed by professional fund managers who have access to research and analytical tools that individual investors may not have access to. This means that fund managers will more likely make better decision than individual investors on which assets to invest in. Furthermore, investing in unit trust also allow investors to take a more hands off approach to investing, decreasing the amount of work that investors have to do when managing their portfolio.
Unit trust typically invest in a wider range of assets. This means that by investing in unit trust, investors can better spread their risk, since poor performance of one asset in the unit trust will less likely to have a major impact on their investment as a whole.
Unit trust also grant investors access to a wider range of assets. This is because certain assets may require a minimum investment amount before one can invest in it. As a result, individual investors might find it difficult to access these assets due to lack of funds. By investing in unit trust however, investors are pooling their money with that of other investors, which will in turn, grant them access to these assets which were otherwise out of their reach before.
Disadvantages of Unit Trust
Now that we have covered the advantages of investing in unit trusts, naturally the next question to ask will be, “Why doesn’t everyone invest in unit trust?” or rather, “What are the disadvantages of investing in unit trust?”.
1.Lack of Control
When you invest in a unit trust, you will forfeit any control over the choice of individual assets that go into the fund. The fund manager will be the one who will have full control over which assets to invest in. This lack of autonomy might be unappealing for investors who desire to have greater control over their portfolio.
Like any other investment, there still exists an element of risk when investing in unit trust. Although it was stated above that unit trust are good at spreading out risks, it does not eliminate risks entirely. Fluctuations in the price of your unit trust will still occur.
There are a variety of fees associated with investing in unit trust that will reduce your returns. We will talk more about the different types of fees in a later section of this article.
With this, we have covered the questions, "What is a unit trust?", "Why do people want to invest in unit trust?" and "What are the disadvantages of unit trust?". In the next part of the series, we will be covering the administrative details of investing in unit trusts and also common questions that are asked with regards to investing in unit trust.