Areas of Consideration in Investing in Unit-Trusts

Unit Trust offer significant benefits, but you should also be aware of the following considerations.

You can be overwhelmed by the availability of funds offer to you. If you invest indiscriminately, you could end up with an assortment of unit trusts that do not match your needs. Thus, you must be clear about your investment objectives and then decide on the suitable unit trust.

The fees you pay for investing in unit trusts can eat significantly into your returns. These fees may also includes high transaction costs so investors should be aware. You should inquire about the type and amount of fees applicable to a particular unit trust. You Independent financial advisers (IFA) will be ready to provide you the service in getting the information to you..

The selection of the fund manager is another important consideration. You will need to assess whether has the resources, experience and skills to do a good job of managing the fund. Once the investment is made you still need to monitor the performance to see if it is meeting your expectations.

Good recent performance of a unit trust may attract you to invest in it. This may not be advisable however since it is difficult to judge consistency over a short period. Consistent good performance over a longer period is a better guide to the quality of the fund manager, but even then it must be noted that past performance is not necessarily a good indicator of future performance.

Evaluating Unit-Trust Performance

There are three main ways of evaluating the performance of your unit trust. one is by looking at Absolute returns, taking into account both the income received and price change. You can obtain information on total returns on total returns from the manager of the fund or 3rd party analyst views.

Normally, these returns are annualised so that you can examine performance over a stipulated time frame and also to enable you to compare performance of one fund relative to another. However, absolute return is not sufficient measure of a fund's performance.

The second way is o judge a Unit Trust's relative performance by comparing it against its benchmark index. The difference, called excess return, is calculated by subtracting the benchmark against which its performance is measured. For example, the typical benchmark for unit trust investing in Singapore stocks is the Straits Times Index. If the excess return is positive, the unit trust is said to have outperformed its benchmark. If it is negative, the unit trust has under performed.

The benchmark index represent how the entire market performed on average. Comparing a unit trust's performance against its benchmark is a more useful measure of the skill of the fund manager. Other than passive or index funds which replicate the entire benchmark index, a fund should be expected over a reasonable time horizon to outperform its benchmark.

Two (2) unit trust can have the same excess return over the same time horizon, yet performance may not be equal, as risk has not been taken into account. The third method therefore is to measure the performance of the unit trust relative to the risk taken. One widely used statistic is the performance ratio which measures the excess return per unit of risk taken, with the latter measured by the volatility of the excess returns. If the information ratio is positive, it indicates the presence of some skill in the fund manager. A negative information ratio indicates that the fund manager has under performed the benchmark return.