Beginner Investor Series: Unit Trust Part 3 (Fees and Comparing between Funds)

Previously, we have attempted to answered some of the more in depth and commonly asked questions about unit trusts. Today, we will be moving on to the fees involved when buying unit trusts and also the different method we can used to compare unit trusts.

What are the Fees Involved when Buying Unit Trust?

There are a variety of fees and charges that had to be paid when buying unit trust, but generally, the fees can be separated into two different categories, those to be paid by you and those to be paid by the fund.

1. Fees to be Paid by You

i) Initial Sales Charge (Front End Load)
These are one-time fees charged when you purchase a unit trust. The fee amount is typically 1.5% to 5% of your investment. Funds that charges an initial sales charge will usually not charge a redemption fee.

ii) Redemption Charge (Back End Load)
These are fees that are charged whenever you sell or redeem the fund. The fee amount is typically 1% to 5% of your investment. Funds that charge a redemption charge will usually not charge initial sales charge.

iii) Switching Fee
These are fees that are charged when you choose to switch to another fund managed by the same fund manager. The fee amount is usually about 1% of your investment.

iv) Wrap Fee
These are fees charged by investment advisor to you for their services, such as investment advice, investment research and brokerage services.

v) Platform Fee
These are fees that charged quarterly, and it is only present when you utilize online platforms such as fundsupermart for your unit trust investment.

Platform Fee Source: Fundsupermart.com
Platform Fee
Source: Fundsupermart.com

 

2. Fees to be Paid by the Unit Trust

These are recurring fees that the fund manager, trustee and other parties charge the fund for providing their services. Although these fees are not paid by you, they are still paid for by the unit trust. This means that these fees will still reduce the amount of return you receive from your investment.

i) Management Fee
This is the fee charged by the fund manager for the management of the fund. The fee amount is typically 0.5% to 2% per annum of the Net Asset Value (NAV) of the fund.

ii)Trustee Fees
This is the fee charged by the trustee for the provision of custody services for the fund’s assets. The fee amount is typically set at 0.1% to 0.15% of the Net Asset Value (NAV) of the fund.

iii) Miscellaneous Fees
The miscellaneous fees include other fees such as the fund administration fees and the audit fees.

Information about the different fees for a particular unit trust can usually be found on the prospectus of the unit trust, which you can obtain from either the fund manager before you purchase the unit trust, or from online platforms that sell unit trusts such as Fundsupermart.com or Poems.com.sg.

 

How do I Compare and Choose between Unit Trusts?

We have covered what is a unit trust, the advantages and disadvantages of investing in unit trusts, the commonly asked questions about unit trusts and the fees involved when investing in unit trusts. However, with so many different types of funds in the market, one may wonder how one know which unit trust to invest in? There are actually several ways available for one to evaluate the performance of a fund and compare between them:

 

1.Total Returns

The total returns of a fund account for both the income received from the fund and also from price changes. You can compare performance of different funds by looking at the total returns of the different funds. When comparing between two different funds, the one with the higher total return is the better performing fund. It is important to keep in mind however, that past returns are not indicative of future performance.

You can find the total returns from the fund manager or from the Investment Management Association of Singapore(IMAS)/Life Insurance Singapore (LIS) Fund Singapore website or from the fund’s fund report.

 

2.Fund’s Performance Against its Benchmark Index

You can also evaluate a fund’s performance by measuring it against a benchmark index. If a fund’s return is higher than the benchmark index, it is said to have outperformed its benchmark index. Conversely, if a fund’s return is lower than the benchmark index, it is said to have under performed its benchmark index.

You can find a fund's performance against its benchmark index by looking at a fund's fact sheet as shown in the screenshot below. A fund's fund fact sheet can be found at fundsupermart under the fund's page.

Source: Aberdeen Singapore
Source: Aberdeen Singapore

 

3.Sharpe Ratio

The Sharpe ratio is an indicator of the performance of the fund relative to the risk taken. It measures a fund’s historical risk-adjusted performance. When comparing two fund’s Sharpe ratio that are benchmarked against an index, the one with the higher Sharpe ratio gives more returns for the same level of risk and is thus the better performing fund.

Sharpe Ratio

A fund's Sharpe ratio can also be found on the fund's fund fact sheet as shown in the screenshot below.

Source: Aberdeen Singapore
Source: Aberdeen Singapore

 

4.Volatility

Volatility measures the fluctuation of a fund’s value over time. Higher volatility implies higher risk, so when comparing two fund’s volatility, it is safer for you to pick the fund with the lower volatility.

You can also find the volatility of a fund on a fund's fact sheet, however since the volatility of a fund is measured by the Standard Deviation of its returns, therefore in order for you find a fund's volatility, you will have to look at its standard deviation as shown in the screenshot below. A lower standard deviation means that the fund is less volatile, conversely a higher standard deviation means that the fund is more volatile.

Source: Aberdeen Singapore
Source: Aberdeen Singapore

 

5.Total Expense Ratio (TER)

The total expense ratio (TER) is the operating expenses of the fund over the fund’s assets. It can be used to compare the costs incurred by different funds with the same investment objectives or strategy. The lower the value of the TER, the lower the cost incurred by the fund.

 

Total Expense Ratio

You can find the TER of a fund from fundsupermart by going to Tools & Fund News > Funds Selector > Key in the variables that you want and selecting "Fund Info Table" under "I want to view" > Generate Table. The TER of a fund can can be found under "Annual Expense Ratio" as shown in the screenshot below.

TER
Source: Fundsupermart.com

With that, we have covered the different types of fees that are involved with the purchase of unit trust and also the measures you can look at when comparing unit trusts. In the next and final post of this series, we will be looking at the different ways one can buy unit trust and also I will be using myself as an example to demonstrate the full process of  comparing and selecting funds to invest in.

 

Source:

http://www.moneysense.gov.sg/Understanding-Financial-Products/Investments/Types-of-Investments/Unit-Trusts.aspx

http://www.mas.gov.sg/~/media/Moneysense/Guides%20and%20Articles/Guides/Making%20SENSE%20of%20Unit%20Trusts_English.pdf

www.fundsupermart.com

 

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