Why invest in Unit Trusts
Given the current global economic climate, investing has become more about letting your money grow steadily over the long-term, rather than hoping for the market to work in your favour with huge upswings. Investment products work differently when it comes to managing risk and planning for the long term. Securities and Money Market are two of the most popular investment vehicles, but are used in a variety of ways depending on one’s risk profile and investment horizon.
A unit trust is a fund where your money is pooled together with other investors to invest in a portfolio of securities and managed by a fund manager based on the fund’s investment objective. When you buy a unit trust, you are investing in a diversified basket or portfolio of securities managed by professional fund managers that have carefully screened and put on their shelf for you to invest in, instead of choosing the assets one by one yourself.
The main advantages of investment into a Unit Trust fund is the reduction in investment risk by way of diversification as well as having approved professional investment managers manage the funds. Unit trust investments generally tend to invest in a range of individual securities. However, if the securities are all in a similar type of asset class or market sector then there is a systematic risk that all the shares could be affected by adverse market changes. To avoid this systematic risk, investment managers may diversify into non-correlated asset classes. For example, investors might hold their assets in equal parts comprising of equities and bonds.
Unit Trusts allow investors to invest in a diversified range of assets with less starting capital. As their money will be pooled with that of other investors in the same unit trust. Investors can afford to have a more diversified portfolio than they would if they had to buy them directly. Investors get access to more options in sectors and investments that are not easily accessible as to them as individuals.
Unit trusts fund managers are approved professionals in a highly regulated industry. Their license, background and expertise ensures that decision making is structured and according to sound investment principles. In the process, unit trust funds enjoy the depth of knowledge and experience that fund manager can bring. In the long term, it is this expertise that should generate above average investment returns for unit trust investors.
For an individual investor, it may be difficult to have exposure to particular asset classes. For example, if an investor with wants to be invested into property, global equity and bond market, it would be impossible to simultaneously hold a direct investment portfolio in all of these markets. However, with unit trust investments, it is possible to spread the funds around to all of these asset classes concurrently so that the investor can gain the investment exposure he seeks.
If one investor were to buy a large number of direct investments, the amount they would be able to invest in each holding is likely to be small. Dealing costs are normally based on the number and size of each transaction, therefore the overall dealing costs would take a large chunk out of the capital (affecting future profits). Pooling money with that of other investors gives the advantage of buying in bulk, making dealing costs an insignificant part of the investment. In addition, since the fund managers invest in larger amounts, they are able to get access to wholesale yields and products, which are impossible for the individual investor to obtain.
In conclusion, there is no one-size-fits-all solution, and for many investors, the answer might be to include both stocks and unit trusts in their portfolio.
The information in this article is meant for informational purposes only and should not be relied upon as financial advice. Users may wish to approach a financial advisor before relying on any advice provided to make any decision to buy, sell or hold unit trusts.
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