Unit trusts are often promoted as long-term investment vehicles by bankers and financial planners.
But are unit trusts really such great investments?
While it is true that unit trusts offer some benefits over other forms of investments, it isn’t with its flaws. Today, we shall explore the top 3 myths regarding unit trusts.
1. Unit Trusts are Risk Free
A well constructed investment portfolio of unit trusts is usually diversified across several assets, sectors, countries, etc, ensuring that investments are carried out in a controlled manner. Unit trusts are also regulated financial instruments and the regulating authorities must ensure that investors’ interests are protected.
However, like all types of investments, unit trusts are not risk free.
- Equity based funds may not do well during bear markets
- Bond funds tend to under perform during high interest rate environments.
- Sector funds are vulnerable to industry cycles
- Single country funds are susceptible to recessions
The risk of a fund also depends on its underlying instrument. For example, a Technology fund can be more volatile compared to a Singapore fund that only focuses on a few local blue chip companies.
2. You can’t go wrong buying the Best Performing Funds
Buying a unit trust just based on its current outstanding performance is a risky strategy, because you may end up buying too high. Top performing funds tend to fall in price when large institutional investors like banks sell off their funds to cash in profits.
Fund buyers must keep in mind that the current and past performances are not sure indicators of their future performance. The top funds today can be tomorrow’s worst funds.
3. Index Funds are Good Investments
Index funds are popular among retail investors due to their relatively low management fees. However, such funds seek to track a particular market index and is usually unable outperform the market index.
It is important that you have realistic expectations of what kind of returns you can get from unit trusts. If you need advice on unit trusts, seek help from an experienced financial planner before you make your investment decision.
