Unit trust can be daunting to investors who need to become more familiar with collective investment schemes’ complexities. In this highly informative guide, we will explain in detail what a unit trust is and how it works and further delve into the basics of investing in one.
We’ll provide insight on topics such as objectives for different types of trusts & the governing regulations they work under, risks associated with different trusts & how these may vary depending on which asset class you decide to invest in (i.e., stocks vs bonds).
By gaining a solid understanding of these fundamentals, you are more likely to make informed decisions when exploring your options beyond traditional investments, such as buying stocks or mutual funds.
Introducing Unit Trusts and Collective Investment Schemes – What is it and how does it work
ADSS defines unit trust as a collective investment scheme whereby the investor’s money is pooled together in a trust fund. It enables investors to purchase shares representing their ownership of part of the fund, managed by an appointed manager who invests on their behalf.
The unit trust structure works similarly to a mutual fund, except that each investor buys units instead of buying into the entire fund. The individual units represent a fractional part of the entire fund and generally carry lower administrative fees than those associated with mutual funds.
Unit trusts can invest in various asset classes, including stocks, bonds, commodities, foreign exchange and other securities – depending on which strategy you choose for your investment portfolio. As such, when investing through unit trusts, one must consider risk appetite, objectives and the level of diversification you want to achieve.
Benefits of Investing in a Unit Trust
Unit trusts offer a range of advantages such as cost efficiency, diversification and professional management. The fund manager will be responsible for researching and selecting the most suitable investments to meet the investor’s goals. It saves investors time and effort to focus on other aspects of their portfolio or take advantage of opportunities in different markets.
Cost efficiency is another significant benefit of investing through unit trusts since investors don’t have to pay separate fees for each security being bought – instead, they are charged one set fee, which covers all purchases made by the fund manager. Furthermore, with individual securities requiring minimum purchase sums (which may exceed many investors’ budgets), this method allows even those with limited funds to access a wide range of markets and asset classes.
Finally, unit trusts allow investors to diversify their portfolios across multiple asset classes and capitalise on the potential returns associated with different markets. It can help to reduce their overall risk exposure and improve performance in the long run.
Types of Unit Trusts – Open-Ended Funds, Closed-Ended Funds, Exchange Traded Funds (ETFs), and Index Funds
Open-ended funds are the most common type of unit trust and allow investors to buy or sell their units anytime. These can invest in various asset classes, such as stocks, bonds and commodities.
Closed-Ended funds are more rigidly structured than open-ended ones, and investors must purchase their units before they can begin investing. This type is usually employed for long-term investments, such as retirement plans or education funds.
Exchange Traded Funds (ETFs) offer a combination of features from both types of trusts; they are bought and sold like stocks but track an underlying portfolio similar to that of a mutual fund. It means that ETFs provide access to multiple asset classes in one purchase.
Finally, index funds are passively managed and track a specific index or market segment. These allow investors to gain exposure to a particular sector without actively monitoring each security within that market – thereby reducing overall risk.
Understanding the Fees Associated with Investing in Units Trusts
Investors should be aware of the fees associated with investing in unit trusts, as these can vary depending on the type of trust they invest in. For instance, open-ended funds generally charge an annual management fee to cover the portfolio’s cost – this is usually around 1-2% of the total fund value and may include other expenses such as marketing or administration costs.
Closed-ended funds also incur similar charges but may have higher set-up fees due to their complexity. ETFs, meanwhile, often carry lower fees since there are no commission costs associated with buying and selling shares. Finally, index funds usually have low expense ratios since they involve minimal trading activity.
The Risks Involved in Investing in Unit Trusts
Like any other investment, unit trusts come with a degree of risk. Before investing, it is vital to consider the type and level of risk you are comfortable taking. Generally, risks associated with stocks and bonds tend to be higher than those of commodities or foreign exchange funds. However, this will vary according to the particular trust in question.
In addition to market volatility, investors should consider fees when evaluating the risk involved. The higher the expense ratio for a given fund, the more likely your returns will be lower after accounting for costs. Therefore, careful research should be undertaken before committing money to a unit trust.