Understanding Unit Trusts

Standard Chartered Bank

Unit Trusts is a general term for funds that allow you to pool your money with that of other investors and is managed by a team of investment professionals.

The term may vary across countries but Unit Trusts may also be referred to as collective investment schemes, mutual funds or simply as funds.

The pooling of your money generally creates greater buying power so you are able to invest in a wider range of investments than possible for most individual investors.

Each investor in a fund owns units (or shares) which represent a part of a fund’s portfolio holdings.

Unit Trusts can be categorised by the type of assets they invest in (such as shares, bonds, cash or other securities).

You can refer to the Unit Trust’s prospectus and factsheets to get a better understanding of its respective investment objectives and policy (for example, type and mix of investments) and past performance along with the various fees charged.

Unit Trusts charges various fees and some examples of fees that may be charged are:

Management fee

– Typically charged to the fund to pay the investment manager of the fund.

Custodian/ trustee fee

– Typically charged to the fund to pay for services provided by a custodian or trustee of the fund.

Entry fee

– Typically called a sales charge, it is deducted directly from the subscription amount and paid to the distributor.

Any fees that are charged to the fund is paid out of fund assets and will be indirectly borne by the investors. There are many types of Unit Trust, but broadly speaking, they can be divided into four main categories:

1. Equity (Stock) Funds

As the name suggests, Equity Funds consist mainly of stock investments and are the most common type of Unit Trusts. Often, Equity Funds focus on a particular type of investment strategy, such as Growth, Value, Large Caps and Small Caps or themes such as Property, Energy and Healthcare. The funds can be invested globally, regionally or in single countries.

2. Bond (Fixed Income) Funds

Bond Funds invest mainly in debt instruments including government bonds, corporate bonds or mortgage-backed securities.

The return that a Bond Fund may have can vary depending on the type of bond. Typically, Bond Funds that invest in short-term bonds tend to be less volatile. Bond Funds that invest in corporate bonds generally do so to obtain higher yields, thus carrying greater risk.

3. Money Market Funds

Money Market Funds seek to maintain a stable net asset value by investing in the short-term, high-grade securities sold in the money market.

These are generally the safest, most stable securities available, including Treasury bills, certificates of deposit and commercial paper.

4. Hybrid Funds

Hybrid Funds invest in a mix of stocks and bonds and may also hold money market instruments which can vary proportionally over time or remain fixed. They may be further sub-divided into Balanced Funds, Asset Allocation Funds and Life-Cycle Funds.

WHAT ARE THE BENEFITS?

Diversification

Unit Trusts can give you instant diversification. With as little as BND1,000 you can buy a fund which invests in equity and bond markets around the world. The investment risk is spread over many securities, thus potentially reducing the volatility of your portfolio.

Active, Professional Management

You can enjoy professional management when you invest in Unit Trusts. The investment professionals will manage the funds on your behalf using their experience, skills and resources.

Liquidity

Generally, Unit Trusts is priced daily and open-ended, you can redeem your units any day and get your money back promptly at the prevailing price (net asset value) of the fund.

It is best to refer to the fund’s prospectus or factsheets to better understand the price at which the fund will redeem your units.

WHAT ARE THE RISKS?

When you invest in Unit trust, you should read through the fund prospectus, which will detail the risks involved in investing in the Unit Trusts.

We have outlined examples of general risks relating to an investment in Unit Trusts, but it is important for you to review each prospectus in detail so that you are aware of all the risks you may incur for a particular Unit Trust.

Market Risk

This is the risk that the value of a unit trust’s investments may fluctuate in response to broader market movements – for example, in the stock or bond markets.

In addition, the market price (net asset value) of unit trusts may fluctuate in response to volatility in their component investments.

Currency Risk

If Unit Trusts invests in overseas securities, this is the risk that any adverse foreign exchange movement in the currencies of denomination of these securities against the Unit Trusts own reporting currency will have a negative impact on the Unit Trusts net asset value.

Investment Objective Risk

This is the risk that your objectives will not be met by investing in the Unit Trust. At the end of the day, like with all investment choices, you do need to ensure that what you choose matches your risk profile and appetite, while at the same time, ensure that you are fully informed of your investments. It should also match up with your overall financial plan and help towards achieving your financial goals.

This article is for general information purposes only and while the information in it is believed to be reliable, it has not been independently verified by us. You are advised to exercise your own independent judgement with the contents in this article.