Spread in Flexi-link

Dear Mr. Tan,

I checked on the Flexi-link and was told that there is an upfront spread of 3.5%. What is this spread? I was told that my investment will drop by 3.5% immediately after I bought the units of the fund. Is this too costly? Are there any funds that do not charge this spread?

REPLY
The spread is the difference between the offer price and the bid price of the units. You buy the units at the offer price and sell them at the bid price. If you invest today and sell immediately, you will suffer a loss of 3.5%, due to the spread.

This spread is used to pay the agent for selling the investment to you, and to the insurance company for its expenses. If you invest $100,000, you will lose $3,500 immediately, due to this spread.

If you keep your investment for 5 years, the spread of 3.5% average out to a cost of 0.7% per year. You have to incur the annual expense ratio, which is about 0.5% to 1.3% per annum (depending on the type of fund). The total cost is 1.2% to 2% (which is rather high). If you keep the invetment for a longer period, then the cost comes down.

If you wish to invest in a low cost fund, I suggest that you consider the STI exchange traded fund. It has an initial cost of 0.3% (i.e. the brokerage to the stockbroker) and an annual fee of 0.3% per annum. This is a low cost fund.