Wednesday, May 07, 2008

Charges of unit trusts

Here are the new types of charges you can expect:

Performance-related charges
Instead of paying a fixed fee, the charges are determined by the fund's performance. The better it performs, the higher the charge, but if it doesn't perform you don't pay.

Up-front charge
This can be compared with the present initial charge and is deducted from your money before it is invested.

Back-end charge
Also known as an exit fee, this is payable when you sell your units, and is usually levied on a sliding scale to attract investor loyalty. For example, if you sell after one year you could be charged 5%, after two years the fee drops to 4%, after three years to 3%, after two years to 2%, and after five years to 1%. After that you won't pay.

No-load funds
With no-load funds the investor does not incur any charges other than the annual service fee. These funds are suited to investors who invest directly with the asset management company (by-passing the broker and his commission).

Trailer fees
These are added on to the annual service fee and paid to brokers on a quarterly basis as an incentive not to switch investors to other funds. At present brokers are paid a one-off upfront fee.

All the above fee structures can be applied in combination, depending on the asset management company, for example, by lowering the initial fee but introducing an exit fee.

Performance-related fees would be levied on some of the existing funds if unitholders agree, and on new funds. The annual service fee may be raised for new funds.

Investors will need to compare the various products and their fee structures before committing their savings.

My recommendation
1. Select well diversified funds with low expense ratios, e.g. indexed funds
2. The upfront charge should be 1% or less. Better still, go for no-load funds.
3. The expense ratio should be 1.2% or less (for actively managed funds) or 0.6% or less (for indexed funds).
4. Transact directly through an internet portal, e.g. Fundsupermart, DollarDex, POEMS

No comments:

Blog Archive