Unit Trusts: The Advantages and Disadvantages

Unit trusts, also known as mutual funds, are a type of pooled funds, which means that investors pool their money together to be invested by an experienced fund manager. However, like other investment vehicles, it also has its pros and cons.

The Good

1. Funds are managed by fund managers

Unit trusts are perfect for the novices and busy people, since the funds pooled into unit trusts are managed by a fund manager equipped with the experience and know-how to properly diversify your collective investment portfolio. It’s a win-win situation, since you’ll be able to dabble in an investment vehicle with higher returns than fixed deposits, and your fund manager will be able to take a cut of your profits as payment rendered for his services.

2. Stockbroker fees may be negotiated lower

If the pooled amount is large enough, investors may be able to use the financial muscle to drive the stockbroker fees lower. Your savings can be pretty significant, even if the difference in percentage is in the single decimals. Think about it this way: even 0.1% of RM1,000,000 amounts to RM1,000, so if you managed to reduce your stockbroker’s fees by 0.5%, you’d be saving RM5,000, just like that.

3. Easy diversification

Your fund manager will invest the pooled funds into various investment vehicles such as equities, bonds, shares and so on. As an investor in that unit trust, you’ll be able to reap the diversification benefits as well. And if you decide to liquidate some or all of your portfolio in a fund, it will be easier to do compared to liquidating it in the market directly.

The Bad

1. Extra costs

Since a fund manager is the brains behind your unit trust, not you, you’ll have to bear in mind that their services will mean extra costs to you as an investor. You’re basically hiring someone to do a job  – or in this case, render a service – to you. So be prepared to fork out annual management fees and other miscellaneous fees that you should weigh against the value of investment you’ll obtain in order to maintain a profit.

2. Possibility of dilution

Brokerage and acquisition fees will be charged every time securities are bought, and this creates a cash out-flow that may add up to a substantial amount. Large cash in-flow and out-flow will change the percentages of the investors’ underlying assets. The good news is that dilution won’t last forever, and if the financial move was a smart one, the move will pay off.

3. Only one way to purchase securities

All investments in a unit trust can only be purchased directly from your trust issuer. With unit trusts, there’ll be no comparing brokerage rates, no comparing commissions, no switching of brokers. You’re stuck with your single trust issuer. In short, your convenience is bought at the cost of uncompetitive pricing.

Conclusion

Unit trusts are an easy way to get your feet wet in more active forms of investment, even without the technical knowledge to navigate through the various investment vehicles available. However, they have their disadvantages, too, so weigh them well before proceeding.

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