Monday, April 28, 2008

Investing in Unit Trust

Dear Mr. Tan,
Is unit trust a complicated product? Do you recommend investing in a unit trust?

A unit trust is generally a simple product. Your money goes into a fund which is invested on behalf of all the investors. The fund manager has to disclose the following:
a) Upfront spread
b) Expense ratio (i.e. the annual charge)
c) Scope of investment.

It is best to invest in a unit trust that has no spread, i.e. the same price is used for buying and selling of each unit, or a spread of not more than 1%. You should choose a fund with low expense ratio, less than 1% per annum.

If you select a unit trust that has a high spread and expense ratio, you have to be sure that the fund manager is able to produce a better return compared to the market. Usually, it is difficult to make this judgement.

I prefer to invest in an indexed fund, such as the STI ETF. It has no spread (except a transaction charge of 0.3%) and an expense ratio of 0.3%. An ETF is like a unit trust, except that it can be traded on the stock exchange. A unit trust is transacted daily based on the net asset value at the end of each day.

Tip: invest in a low cost unit trust, such as the STI ETF.

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