Sunday, December 14, 2008

Unit Trust (2) – Why invest and Why not?

Unit Trust, in my opinion, is just another way to invest apart from the stock or property market where many people are already in. Its may not be the best way to invest, but its certainly a good way to diversify our assets and it is made to be so easy and convenient for everyone to invest.

Why Invest in Unit Trust?
1) Suitable for almost anyone on the street
We can start to invest with as little as $1000 or $100/mth. Its so modest that it practically means that anyone can invest.
2) Can Invest big and wide with small money
UT allows us to invest in Securities that we may be unable to access as an individual investor. These securities includes bond that usually required a minimum investment of $100.000. We are able to access into the global stock or bonds market using the Unit Trust way.
3) Its liquid and as simple as ABC
Buying and redeeming unit trust is simple and easy. Most unit-trust allow daily buying and selling of units. We can get updated values of the price of our unit trust from the daily newspaper or Internet. Online investment platforms have made it easier for investors and Financial Planners in giving advices too.
4) Portfolio investment creates flexibility
* With several hundreds of funds available, we are able to construct an investment portfolio based on the individual investment goals, risk tolerances and preferences, etc.
* We determine our % of bonds, Equities and Cash. We determine the region, countries or themes to invest. We determine which fund manager to park our money in. We are so spoilt for choices under a UT investment.

Why not invest in Unit Trust?
1) Additional Layer of Cost
Management and Trustee fees are paid from the pool of money. It can go as much as 3% per year. We pay advisers a Sales charge on a new purchase. It can go as much as 5%. These charges eat into our returns.
2) No Micro-management
We are not able to invest into the specific companies or sectors which in our opinion is bullish. Our investments are solely dependent on the fund manager and we are not properly updated when they change strategy.
3) Not suitable for speculation and trading
Unit Trusts generally move slower due to its diversified nature. Considerable time are required to buy, switch and to sell. Because of the slower price movement, time needed to trade and the initial expenses, it may not be fast enough to make quick money.

What are the Risk when we invest in Unit Trust?
1) Investment Risk
* The Systematic and Unsystematic Risk of investment. Systematic Risk such as inflation and the current economic crisis cannot be diversified away.
* If you invest in the wrong sector or country, you will lose money.
2) Fund Manager Risk
* Even if the sector is supposedly doing well but you select the wrong fund manager, you may also lose money.
* This Fund Manager might be underperforming the benchmark by a wide margin.
3) Trustee Risk
* The worst case is if you select the right sector, right manager but the trustee went bankrupt or run away with your money, you will also lose money. Such cases are very very rare

* That’s why I always advocate diversification and portfolio investment to reduce some of these risk.

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