Investing in unit trust
I am a big fan of unit trust for one main reason – I do not need to actively research on the stocks to buy into. I used to think that all I need to do is to get an agent and be done with it.
However, to my dismay, I later learnt that I still need to do this research, but on the fund instead of the stock! But this was like years ago and I have since become more aware of what I am buying. Phew!
Here, I would like to share some things which one needs to know before investing in unit trusts:
1) What are your objectives? Why are you buying the fund for? Depending on what your objectives are, you then need to decide if you want a fund which provides a steady stream of income or you are into capital growth or even a mixture of both. You then have to see if the fund’s investment objective is in line with yours.
2) How long are you investing for? Long term (retirement, education funds) investment differs from mid term (buying/ upgrading house, cars) investment, which is also different from short term (as an alternative to fixed deposits) investment. This will tie-in with point (1) above. Your duration is determined by your investment objectives.
3) What is the asset allocation like for the fund? This determines the fund’s asset allocation. Is it heavy equities – local, regional or global equities? What proportion are in equities and bonds/ money market? What countries or sectors is it investing in? How active is the portfolio managed? All these will have an impact on the fees charged to you.
4) Are you game for it? What is your risk profile? Are you a risk taker or are you risk adverse person? How much of risk you are willing to take will determine what type of funds to buy. Apart from your own risk profile, you should also be mindful of market risks, liquidity risks, interest risk, etc. This is especially so if you buy regional or global funds.
5) How has the fund been performing? This is especially true for funds which have been around for a while. Seeing how a fund have performed during a boom and bust period is a good indication of how it will weather the uncertainties. Of course, we must also compare it to its benchmark. One thing to note though, past performance does not guarantee future success of the fund!
6) What are the charges involved? Because we do not have to do the hard work, the fund charges us a certain sum for it. The amount and type charged depend on the funds which we buy in to. Index linked funds are less labour oriented compared to a growth fund for example, and hence its management fees are lower.
Amongst the charges involved are sales commission, front-end load, back-end load, redemption fees, purchase fee, exchange fee, management fees, and admin fees.
While this list may seem a lot, it is nothing compared to getting ourselves into technical analysis, fundamental analysis, PE ratios, book value, EBIT, discounted value, dividend yield, etc.
Investing is definitely not an easy task, so choose your fund house carefully. Get to know your agent before parting with your hard earned money.
Good luck and happy investing!
