Quick Lesson: Unit Trusts

As requested, many people have been asking me about my claims for high returns in unit trusts. I think this misconception is due to many not knowing and undetstanding the principles of unit trusts.

The basics
Unit trusts are basically funds "trusted" to fund managers to be invested accordingly. There are different type of funds. High returns (high risk), Balanced (medium risk), Income (low risk). Typically, high risks are invested largely into equities (shares) or properties depending on the type of fund you buy. Balanced typically mixed with equities and bonds, and Income mainly bonds.

How about the returns?
You'll be surprised. What are your returns for your shares last year? Think about it. Consider all the contra losses. Consider all your cut losses. Consider all your paper losses. Consider all the returns that you fail to reinvest cause you used the money to celebrate your 10% gains. Yes. My guess is that your return last year was less than 15%?

For aggressive unit trusts, Aberdeen Pacific Equity Fund. For the last 5 years, it has consistantly given me a return of 20% PA.

"20% pa only?!??!"

Mind you. At 20% PA, calculated monthly, your $10,000 would become $20,000 in 2-3 years.

"20% PA will mean double your investment in 2-3 years"

Another fund i own. Henderson European Property. Its given mea 40+% PA return last year. And from 2 -5 years ago, its given a 33-35% PA return.

"33% PA will double your returns in 1-2 years"

Remember, the stats above are assuming you reinvest all dividends and capital appreciation.

It just gets even better. My other holding. DWS China Equity. Its given me a 58% PA last year. And the fund is only 1 year old.

Does price of fund matter?
The price of a fund doesn't matter like shares. In fact, there is no such thing as P/E ratio of a fund. The only assurance you have of future performance of a fund is its previous performance.

"You don't look for funds that have bottomed out. Unit trusts don't work that way"

Why its previous performance? Isn't a unit trust that is too expensive dangerous to enter? No it doesn't matter. The reason why the fund is so expensive now is cause the fund managers's investment selections have been right for the last few years. Their investment model, their fundamentals, their asset allocations have been spot on.

"Funds that are expensive, with proven growth over the last years, are your best bet. They will out perform cheap unit trusts with bad performance."

Buy a fund on descend, you can only be assured that the fund managers don't know what they are doing.

Service charges are so expensive!
Consider this. If you were a share trader (notice trader not investor), you buy and sell shares 10 times a month, each time $5000 is traded. You've just paid $300, 6% has been paid. Thats alot of work for a month.

Banks charge 5% for unit trusts.

"Don't buy funds from banks, stupid."

Poems charge 1-2%. With very cheap fees for switching funds.

I'm currently buying funds with an wealth management company. 3% per buy, sell for free, switch funds for free. 1% PA for advise. I don't pay management fees by funds.

I don't mind paying for the services by the wealth management company as they monitor the performance of the funds, they have insider info on the fund manger's capabilities and i'm sure they are able to take care of my money well.

I don't have cash
Thats when you are wrong. have you thought of CPF? The funds above are all CPF OA approved. Imagine how much money you'll have for retirement now if you started 3 years ago?

"Would you rather risk your retirement by buying individual shares, or buy safer high return funds."

Even my CPS SA is growing at 10% PA (vs the 3% PA given by CPF), by investing in AIGIF Acorns, a CPF SA approved funds.

"Its never too late to start. Start now, be rich later"

If you were to buy funds the way they were supposed to be bought, you'll realise that the 3% charge is really insignificant to your investment. Its when you start trading funds (making 10%? cash it in!), thats when you'll see the banks growing rich.

If you need help in kick starting your investments in CPF in Unit Trusts, you can contact me. I can refer you to my financial adviser. From there you can find the value in their services and the 3% per buy (sell is free) is worth it. You don't need much money to start. Whats most important is that you've started.

Ps. i have no direct benefit from refering people to my financial adviser. I'm just sharing what i think is a good way to invest, and to grow your money..