Category: Money Tips
Created on Friday, 27 January 2012 00:00
Written by Sam Goh
In general, a unit trust, otherwise known as a mutual fund, is a collective pool of investments managed by a fund manager accordingly into the various asset classes and geographical regions, based on the specific investment objectives determined. An investor can also invest into a unit trust by buying into units of that particular trust itself.
By looking at a unit trust as an investment product alone itself, it is worthwhile to note that unit trusts are widely regarded to be medium- to long-term investments. In other words, it is relatively rare for a short term trader or a speculator to trade on unit trusts in his or her quest to achieve short term profits within a short period of time. Therefore, investors looking to invest into unit trusts should possess the necessary monetary resources to stay invested in them for a reasonable period of time so as to reap the full returns of the investment product. As such, investors or individuals with relatively short term liquidity needs, such as education funding, should also stay clear of investing into unit trusts due to the inherent incompatibility between the investors’ investment constraints and the product’s characteristics.
Having said that, unit trusts are generally suitable for long-term investors, it is important to understand that each unit trust differs with due regard to their investment mandates, geographical and industrial asset allocation, expense costs as well as inherent risks assumed. Thus, for any new retail investors (essentially beginners) or investors who are looking to invest into unit trusts, the following pertains a list of considerations that you may want to take into account with regard to the unit trusts before actually investing:
- Investment Objectives (Capital Appreciation versus Income Generation)
- Risk Profile (Risk Ratings on the scale of one to 10)
- Investment Strategy (Growth versus Value)
- Foreign Exchange Risks (applicable only when the fund manager invests into foreign currency-denominated assets or take Forex positions)
However, the above list is not exhaustive and there are many other factors that an investor should consider before investing into unit trusts. Generally, different types of unit trusts will possess different levels of risks.
There are many different types of unit trusts available to retail investors in the market. Some of these unit trusts include: global, regional and country-specific equities funds, fixed income or bond funds, money market funds and balanced funds among others.
It is important to allocate sufficient time to engage in research of those that you are interested in so as to determine the most appropriate unit trusts worthy of your investment. Alternatively, investors can approach licensed and specialised financial consultants for their advices on unit trust investing.
As mentioned earlier, an investor can invest in a unit trust by buying units of that particular trust itself. Hence, it is also of importance that retail investors, especially those who are new to investing, to acquire a basic understanding on the pricing of unit trusts.
The pricing of unit trusts are determined via two methods. They are as follow:
- The “Single Pricing” method
- The “Bid and Offer Pricing” method
The Single Pricing Method
Under the single pricing method, unit trusts would provide a single quote that reflects the Net Asset Value (NAV) per unit of the fund. The key feature under this method is that the initial sales charges imposed would be deducted from the invested capital first before the actual number of units are being allocated to the investors.
Bid and Offer Pricing
Under the bid of offer pricing method, there are two types of prices involved here, namely the Bid price and Offer price. The bid price is the price in which investors will sell their units while the offer price is the price at which investors will buy the units.
Apart from the pricing of unit trusts, it is also important to have a basic understanding on the different types or categories of unit trusts available in the market. Here, I will like to elaborate the differences between capital-guaranteed and capital-protected unit trust funds, two most commonly misunderstood funds by many retail investors.
Capital Guaranteed vs. Capital Protected Funds
A capital-guaranteed fund is a fund that offers full guarantee on the capital only if the investor holds the investment until maturity date. However, investors have to note that the fund is still subject to the risk that the guarantor may default even though there is an explicit guarantee. On the other hand, a capital-protected fund functions similarly like a capital-guaranteed fund apart from the fact that it DOES NOT offer full guarantee of the capital.
There are many factors and considerations to weigh prior to investing into unit trusts. But as a rule of the thumb, before investing into unit trusts, seek to develop a general financial plan and have a clear understanding with regard to your investment objectives, risk profile and time horizon.
Disclaimer: The views expressed in this article reflect the personal views of the writer. The information provided herein is general in nature and does not have regard to the specific investment objectives, financial situation or the particular needs of any person. Wisdom Capital LLP and its affiliates, directors, associates, connected parties, employees and/or representatives.