What You Need to Know Before Investing in Unit Trusts



unit trusts

Before you decide to deposit your money into unit trust, get yourself a copy of prospectuses from different funds and read through them. A prospectus is the most important document that you need to understand before investing in unit trusts. It will serve you as a roadmap regarding the fund.

Wide range of unit trust funds are available in the market which come with various investment objectives and risks involved. Investors need to do their homework and make wise decisions in choosing the most suitable funds for themselves. Most of the informations are available in the fund prospectuses.

Here are some of the key elements that you need to find out when reading a prospectus.

Investment objective

While some funds are aimed at providing a steady stream of income, others are mainly focused on gaining long-term capital growth, or a mix between the two. Depending on your own investment objective, when you choose a unit trust fund, make sure that the investment objective of the fund is consistent with what you intend to achieve with your money.

Investment strategy

This tells you how the fund managers are going to achieve the stated objective; the approach that they are going to take and how the asset allocation is going to be in terms of exposure to various investment vehicles and sector selections. It also highlights the relevant domestic or foreign exposures of the fund.

You may want to check on the fund’s turnover rate, as to how frequent the managers re-balance the portfolio through buying and selling. High frequency of trading may indicate High transaction cost, which will eventually eat into the profit of the fund.

Risk factors

Pay attention to the risk factors stated and compare them to your own risk profile and risk tolerance level. The risk factors faced are typically market risk, interest risk, liquidity risk and credit risk. A fund holding investments in emerging markets will be subjected to the economic and political conditions there. Any changes in the foreign currency exchange rate will affect the return of the respective funds.

Investors’ profile

Most prospectuses include an investor profile as guidance for potential investors. It tells you the characteristics of investors who will potentially invest in the fund. However, this is subject to your own unique circumstances that you will need to observe.

Financial performance

This serves as a good indicator of how the fund is managed, especially if the fund has been in existence for a long period. If the fund has managed to survive through adverse conditions, you will naturally have more confidence in its future performance. You can also use this to compare a particular fund’s performance with that of other similar funds and its performance benchmark.

Remember! Past performance does not guarantee future success of the fund!

Fees and charges

As all unit trust funds are professionally managed, various expenses and charges will be incurred, compared to an outright purchase of a security. Some of the relevant fees and charges are:

  • Load (sales commission) – Load funds can charge a front-end load (when you purchase fund shares) or a back-end load (when you sell your shares).
  • Redemption fee – While loads are calculated on the amount you invest, redemption fees are calculated as a percentage of the value of your account when you get out.
  • Purchase fee – You may be charged for share purchases. While a front-end load is paid to a broker, purchase fees are paid to the fund for some of the fund’s costs associated with the purchase.
  • Exchange fee – This is incurred for exchange (transfer) to another fund within the same fund family.
  • Management fees – This is paid out of the fund’s assets and covers operating expenses of the fund’s managers and advisors.
  • Distribution fees – This covers fees paid for distribution of fund literature, marketing costs, and sales commissions paid to brokers.
  • Administrative fees – Included here are expenses such as custodial expenses, legal expenses, accounting expenses, and transfer agent expenses.

All the above charges will be added up when calculating a fund’s expense ratio, which is expressed as a percentage of the fund’s assets. It will enable you to make a meaningful comparison among the cost structure of different funds.


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