Investment Guide: Unit Trust 101
- Interest Guru
- Aug 2, 2016
- 3 min read
What is Unit Trust, and how does it works?
A Unit Trust is a pool of money collected from investors that wish to invest in a portfolio of assets according to the objective as stated by the fund. In a Unit Trust, the funds received are managed by a fund manager which makes decision on what to invest in. An investor in a Unit Trust basically owns a very small slice of all the financial instruments in the portfolio.
Why does investor put their money in a Unit Trust?
Each Unit Trust has its own fund objectives allowing investors to understand what the fund manager is using the money for. When investing in a fund, ensure that the Fund objective match your investment objective. Example: If an investor thinks that European economy will be performing better in the coming years, he may wish to select a Unit Trust Fund with an objective of investing in European companies. The Fund may also have a mandate such as investing in specific geographical region or type of financial instrument the fund may use.
Example: A Unit Trust Fund with a mandate of investing in US High Yield bonds may only invest its fund in US companies and only select bonds from the High Yield bond sector.
What do investors expect from their investment in a Unit Trust?
Having parted with their hard earned money, investors would have certain expectation of what they want to receive from the fund. Unit Trust funds are broadly classified between Income or Growth oriented approach.
Unit Trust fund with dividend pay-out are known as Income Fund and are well received among those in retirement or seeking constant cash income from their investment. Investors receive cash pay-out monthly, quarterly, yearly or as determined by the fund. As dividend paying companies tend to be more matured companies, the NAV price (Net Asset Value) of the fund usually does not have large movement.
Growth fund that focus on fast growing companies that outperform the overall economy, focus on increasing its NAV price tend to not give out dividend. Profit or gains are usually realized upon selling off the investment. Such funds are usually popular among the younger and more aggressive investors which can stomach higher fluctuations on the valuation of their principle investment amount.
Hybrid fund with its growing popularity may have a wider objective, balancing between growth and income by investing in a mixture of financial instruments to appeal to a wider audience with income pay-out and capital growth.
Is Unit Trust suitable for me?
For investor that does not wish to closely monitor their investment on a day to day basis, Unit Trust offers professional management by a fund manager for a small management fee annually. To the uninitiated, Unit Trust offers an opportunity to enhance return on capital without having to acquire details knowledge of a geographic region or industry. With an objective in mind, investor can leave it to a professional fund manager to handle the day to day decision of managing the fund and focus his attention on other aspect of life.
What should investor take note of when investing in a Unit Trust Fund?
Not every Unit Trust fund is successful and some fund may perform badly losing its investors capital. A fund investing in US equities may have its performance benchmark against S&P 500, an American stock market index based on the market capitalization of 500 large companies listed on the NYSE. This provides an indication of how the fund is performing against the general market and the competency of the fund manager managing the Unit Trust fund.
Even with a long track record, past performance is not always an indicator of future performance. Always seek professional advice and ensure the fund objective is in line with your own financial objective before considering an investment in a Unit Trust fund.
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