Thursday, 14 August 2014

Should you Invest in Unit Trusts?

Unit Trusts. Some of you may have heard of it, some may have not. So what are unit trusts exactly and how can they help you on your investment journey?

Let's find out.


Definition: If you invest in a unit trust or fund, your money is pooled with money from other investors and invested in a portfolio of assets according to the fund’s stated investment objective and investment approach. A unit trust is a fund which adopts a trust structure; not all funds use a trust structure. In this guide, the term “fund” will also refer to a unit trust. 

In Singapore, local and foreign funds offered to retail investors are regulated as collective investment schemes. The unit trust or fund is managed by a fund manager. 
(Source: moneysense.gov.sg)

To sum things up, let's begin with a case scenario.

Scenario 1:

Teenager A, Teenager B and Adult C would like to begin investing.

However, they have different financial statuses. For example Teenager A might have $200 to invest. Teenager B may have $500 to invest. And Adult C have $1000.

In Singapore, investing and buying in shares is relatively straightforward. However, these shares come in Board Lots of 100 to 1000. What does that mean?

Say 1 Share of X Company costs $3.10. That's affordable isn't it? But a Board Lot means that you have to purchase a set of 100 / 1000 shares at one go. So that's either $310 or $3010! 

That is why Unit Trusts exist. In a Unit Trust, your money is combined together with a group of other investors and then invested into a portfolio of assets. In short, they are a way of allowing the average Singaporean to begin his/her foray into the stock market.

Unit trusts are often marketed by banks as "Passive Investing". Because your job is to basically pump funds into your Unit Trusts and let the Fund Manager do the work for you and you pay him/her a fee for doing so. Thus, this frees up time to pursue your own interests rather than watching the stock market the whole day.

Let's take a look at some of the ADVANTAGES of a Unit Trust.

1. Your unit trusts are managed by professional fund managers.

2. There are a wide variety of unit trusts and fund managers to choose from.

3. It's convenient and hassle free as many unit trusts allow you to create a Regular Savings Plan (RSP) which deducts your specified amount monthly into your trust based on Dollar Cost Averaging.

4. By pooling your cash with other investors, the fund manager will be able to invest in a wide range of assets thus keeping it diversified and your risks spread out.

However, that being said there are also DISADVANTAGES in a Unit Trust.

1. You would have to pay a sales charge when you purchase a unit trust. Depending on your broker or bank, the sales charge varies. I will elaborate more on that later.

2. Risk. When investing, there are always a certain level of risk involved. Though your risks are diversified with unit trusts that does not mean it's completely risk free.

3. You do not have a say in the investment decisions made by your fund manager. Your fund manager may choose companies with a potential for "Growth" with higher risks or they may decide to stick with companies that are "Safe" with lower risk but good returns.

Now, based on your own research you may have already decided that you would like to invest in Unit Trusts. I spent a considerable amount of time searching through forums and financial blogs for advice and tips. However, there were either none, or the information was limited. Based on my personal experience, I would like to share with you the basics.

Firstly, there are several institutions that offer Unit Trusts. Google Unit Trusts and you should see these few familiar names.

1. POSB
2. OCBC
3. Philips Unit Trust
4. Fundsupermart 



Invest in Singapore Blue-Chip Stocks from just $100 a month- with a fee from as low as $1! (posb.com.sg)


Overview:

What is POSB Invest-Saver? 
It is a Regular Savings Plan ("RSP") that allows you to invest via a GIRO arrangement on a monthly basis. No securities' trading account or CDP account^ is required. All you need is a savings or current account with us. Even better, you can start investing or manage your investment at any of our ATMs islandwide, 24/7!

POSB Invest-Saver is designed for those who:
  •             may not have a huge capital
  •             want to potentially grow their long-term savings
  •             are looking to diversify their portfolio


What will you be investing in?
Through POSB Invest-Saver, you will be investing into the Nikko AM Singapore STI Exchange Traded Fund ("ETF"). When you buy units of this ETF#, you are investing into Singapore's top 30 companies (based on market capitalization) including Singapore Exchange, Singapore Airlines and Singapore Press Holdings (subject to half-yearly review). Collectively, they are known as Singapore's blue-chip companies and their performance is tracked by the Straits Times Index (STI+)
(Source: posb.com.sg)







Look at the number of fund managers and funds that are available. Mind boggling isn't it? But the only fund that I found out through forums that was most discussed, was Nikko Asset Management Asia Limited. Their funds include MYHOME FUNDS and SINGAPORE DIV EQUITY. 
(Do prior research on them before deciding on any investment decision)


What about OCBC?





OCBC has a more limited area of unit trusts available in only a few big name corporations. By experimenting, I investing an initial amount of $1k into Singapore DIV Equity (POSB) and $100 into Singapore Press Holdings. (OCBC)

If you decide to invest into either of them, note their initial investment amount. POSB usually requires an initial investment of $1k and above and subsequent monthly investments of at least $100.

OCBC on the other hand allows you to invest $100 monthly.

They operate on a Dollar Cost Averaging. Meaning that every month, your $100 will buy a specific number of shares. For example if the shares cost $3, you will get 33 shares. If next month the share price is $3.50 you would purchase about 28 shares.

Dollar-cost averaging is a technique used by investors to protect themselves from volatile markets. By accumulating shares in a particular company through investing a fixed amount of money over time, investors could help even out the moments when the market is up against the times when the market is down.
So by fixing the amount you invest over time, you buy more units when the shares are cheaper but fewer units when the shares are more expensive. Proponents of dollar-cost averaging claim that it is not possible to time the market. So by buying fixed amounts in dollar terms regularly you could end up with some expensive shares but you could also buy shares at a cheaper price too. They claim that mathematically it makes sense
But there are two sides to every story. Critics of dollar-cost averaging claim that dollar-cost averaging leaves investors worse off when an investment moves up over time. They reckon that by not investing at the earliest possible time, investors are putting themselves at a disadvantage. That’s because they are foregoing the opportunity of reaping the benefits of higher returns by not being fully invested as early as possible. They claim that mathematically it makes sense too.
It just goes to show that mathematics can prove just about anything you want. That said, dollar-cost averaging can be particularly useful if you don’t have a large lump sum to invest all at once. (And let’s face it, how many of us do.) Consequently, with dollar-cost averaging, you don’t have to wait until you have saved up a large pot of money to invest all in one go.
There can a psychological advantage to dollar-cost averaging also. For example, it can be quite painful mentally if you invest a large lump sum only to find that the investment has gone down in value immediately afterwards. But if you drip the investment in over a period of time then you may not feel quite as bad. If you do intend to dollar-cost average, though, be aware of the transaction fees, which can eat into your returns.
(Source: The Motley Fool)


And, that's it! A simple guide to the world of Unit Trusts based on my own personal experience. There are also Philips Securities and Fundsupermart. But you should do more in-depth research and gain more knowledge before you try them out. I'm learning too as well. It's a tiring process but it will be well worth your time.

Got any questions? Or perhaps you feel that my information is wrong? I love to learn more from you! Feel free to email me anytime.

Signing off,
Teenage Investor

2 comments:

  1. Hi Teenage Investor,

    I think you might be confused with Unit Trusts (Mutual Funds), ETFs and RSPs.

    OCBC BCIP is not a unit trust, but it is an RSP. You own the shares through OCBC, but they are not purchased in a standard lot. (which is why you can transfer the shares to your CDP account if you wanted to. A unit trust would not allow you to transfer your holdings, cashing out is the only option) You can invest in the Nikko STI ETF though, but an ETF is still not a unit trust.

    Although employing the DCA method with an RSP is a good strategy, you might want to read up about Value Averaging which has been statistically proven to beat DCA. However, it requires more work because it is not automatic like DCA. Not trying to be pushy for you to adopt the value averaging strategy, but it is something that most people that talk about DCA usually miss.

    SPH is a good pick for an individual name as it is a reputable blue-chip that has quite diversified underlying businesses. However, you might want to consider diversifying your active stockpicking to include more counters.

    Have you considered the fees of POSB and OCBC in the long term? While they do offer promotional rates now, I am very skeptical about their ability to continue their promotion in the long-run.

    I personally use Phillip because their UT sales charge is only 0.75%, they have a large range of funds, they have occasional promo 0% sales charge and they also put your idle cash in a money market fund while you decide what to UT to buy.

    All the best in your journey Teenage Investor.

    MH

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    Replies
    1. Dear MH,

      Firstly, I would say that though I understand there are differences between ETFs, RSPs and Unit Trusts, I may not have given the correct linkage between these investments. Thank you for pointing that out!

      I did a little more research, yes I agree that BCIP from OCBC differs from POSB Invest Saver as I believed that both invested in Singapore Blue Chips.

      Next, I agree that DCA has it's disadvantages as stated in the blog, which is why I am always looking for a better alternative. I will take your advice and read up on Value Averaging as it sounds very interesting.

      As I'm still in my teens, though i understand that diversifying my portfolio is important I do not have the necessary funds yet to diversify properly. As such, I'm taking one step at a time as I have a long time of investments ahead of me.

      I do not know if the promotions given by both POSB and OCBC will last, as i found that OCBC promotion lasts till the end of September. However POSB has a history of extending their promotion for several years now.

      In addition, I would do more in-depth research with Philips as I plan to open an account with them soon because of their excellent charts and graphs it provides.

      Thank you once again for clarifying with me and giving me the opportunity to learn from a fellow senior investor!

      Teenage Investor.

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