A unit trust is a collection of funds invested by professional fund managers, on behalf of their investors. These investments may include various asset classes depending on the mandate of the fund – US technology stocks, emerging market bonds, China industrial properties, gold and more.

General benefits of unit trusts:

Affordability

Unlike stocks, or property, investing in a unit trust is great for beginners as they can generally start with an investment capital as low as $100. The risk of this investment is generally lower as well compared to other investments, making it affordable if you’re looking at monthly investments.

Diversification

Another added benefit to investing in unit trust is that investors are able to invest in a diversified portfolio of investments, covering various sectors such as consumer product, oil and gas, health, and more.

Liquidity

Liquidity is how easily an asset can be sold and converted back to cash. Unlike fixed deposits, unit trusts are a relatively liquid investment. With unit trusts, you can withdraw and sell your investment easily for cash.

Professional management

Unit trusts are managed by fund managers who are highly-experienced professionals in the investment industry. They are people who advise investors when to withdraw and when to invest, making sure everyone earns their share of profit. Hence, you can be assured that your money is in safe hands.

How does Unit Trust Operate?

Stocks, bonds, property, cash, and other assets are what makes up a unit trust portfolio. They are chosen by professional fund managers according to the style of investing. These securities are bought by the managers and split into equal units which are then sold to the investors (you). The fund is priced daily according to the net asset value of the underlying investments. Dividends and interest from the assets you’ve invested in are either reinvested or paid out.

How does Unit Trust Earn Money?

A unit trust is open-ended and is divided into units with different price points. The total fund asset value is influence directly by these unit prices. Whenever money is added to the trust as an investment, more units are generated to match the current buying price. However, if you decide to remove your investments, the assets are sold to match the current unit selling price – which means profit is then gained.

Profit is gained through the difference between the price of the unit when bought (offer price), and the price of the unit when sold (bid price). According to Investopedia, the difference between the offer price and the bid price is called the bid-offer spread. The bid-offer spread depends on the kind of assets managed and can range from a few basis points on easily liquidated assets.

Things to Consider Before Investing

Identify the best performing fund

There are two factors that determine a fund’s performances:

1. Rate of returns

• The return rate determines your gains and is calculated per annum as a percentage based on the fund’s performance in the market.

2. Awards and recognition

• Good performing funds are usually awarded. One of the best ways to gauge credibility is through the company’s award recognition. However, do note that past performance is no guarantee of future results. Hence, it’s best to do your due diligence on the company.

Understanding different type of funds

Different funds are created differently. Be sure to research and understand the different types of funds and their risks.

Determine the cost of entry

There will always be a minimum amount to enter when it comes to investing. For starters, it’s advisable to find a fund that has lower cost entry as you might not want to risk a big amount of money in your first few attempts.

While all investments come with a risk, there are steps you can take to minimise the chances of loss in your investments. The best advice is to invest through a diversified portfolio, and not to “put all your eggs in one basket”. If you are new, why not try investing in unit trusts?