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One popular investment instrument amongst new investors is a unit trust, also known as a mutual fund. A unit trust collects money from a large number of investors and places it into a fund, which is then used to buy equities, bonds, and other securities. There are several types of funds for you to choose from, and they are all offered by fund management companies.
All these funds have their own investment objectives and strategies, and it can be difficult to choose which fund is suitable for your needs. Here are a few main things you might want to think about before you make your choice.
Being very clear about your investment goals is the most important thing to consider before you select a fund. Knowing your time horizon (how long you can hold the investment) will affect the type of fund you go for. If you’re saving for retirement, you can stand to weather some market volatility but if you’re saving for the shorter term, you may want a fund that provides more stable returns.
Along with your objectives, your risk profile will also shape your investment decisions. There are a wide range of unit trusts available and they vary from low- to high-risk funds. Higher risk funds are subject to increased volatility which may affect the fund’s price.
Investors who have a lower risk appetite may not be comfortable with such a fund, as it could take longer than expected to recoup their returns. You should first be sure of your risk appetite before settling on a type of unit trust.
There are about 10 different types of unit trust funds available in Singapore, all with their individual focuses and strategies. Knowing what these funds primarily invest in will help you to see how they fit into the objectives you’ve settled on.
An equity fund invests primarily in stocks and will be more suitable for higher risk investors due to its susceptibility to market movements. A growth fund is similar but may be even higher risk because it specifically chooses stocks that have the potential to grow significantly.
Other funds which are lower-risk would be money market or bond funds, which invest in government securities, treasury bills, and bonds. Balanced funds include a mix of stocks and bonds and could appeal to medium-risk investors. There are also funds that invest in specific industries which are called sector funds, so if you want to invest in healthcare or tech, these funds could be for you.
To get specific knowledge of what your fund of interest invests in, you can read its prospectus and product highlights sheet. A prospectus is a legal document that accompanies every unit trust, and covers information like the fund’s investment objectives, strategies, risks, fees, and more.
The product highlights sheet complements the prospectus by providing a description of your chosen unit trust, explanation of the parties involved, and who this product is suitable for.
For example, if the market is not performing well and it’s a high-risk fund, how will the fund manage risk and protect investor capital? Some managers may prefer a riskier growth strategy which may result in higher returns, but others may stick to a value strategy which focuses on undervalued securities.
No one strategy is strictly better than the other, but knowing your manager’s investment approach will inform you of the types of decisions they will end up making on your fund.
The last step would be to research the fund manager who’s going to be taking charge of your fund.
It’s important to choose a manager that has demonstrated a solid performance track record against a reputable benchmark like the Straits Times Index (STI) or S&P500 Index. In addition, look into the personal historical performance of the fund manager, as this will give you a clearer picture of their investment style and decision-making process.
Choosing a seasoned fund manager with a clear investment philosophy could affect the returns you eventually receive as well. Someone with more experience has probably seen a wider range of market conditions and has a better chance of weathering any market downturns.
After taking these four factors into consideration and choosing a unit trust, it’s important to continue monitoring the performance of your fund. If at any point your objectives change and the fund you chose no longer meets your needs, your financial adviser will be able to guide you on how you can adjust your portfolio.