Invest

Unit Trusts vs Securities – What’s the Difference and Which is More Suitable for You?

invest, trading, income, returns

Mark Cheng

0 Comments

This post was written in collaboration with HSBC. While we are financially compensated by them, we nonetheless strive to maintain our editorial integrity and review products with the same objective lens. We are committed to providing the best recommendations and advice in order for you to make personal financial decisions with confidence. You can view our Editorial Guidelines here.


Given the current global economic climate and Singapore’s own advanced stage of development, investing these days is 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.

Different investment products work differently when it comes to managing risk and planning for the long term. Securities and unit trusts are two of the most popular investment vehicles, but are used in a variety of ways depending on your risk profile and investment horizon. So, which one is for you?

 

What are securities?

The term ‘security’ is very broad. In an investment context, a security is a financial instrument that can be traded, typically on an exchange, and has a monetary value.

There are many types of securities, with stocks and bonds being the most well-known by the general public, as well as Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs).

 

Pros and cons of securities

– Pro: Potential for higher returns – Securities, when traded wisely, can offer relatively high returns compared to some other types of investments. Asset classes like stocks are more volatile than some other investment products, and hence can potentially give you higher gains in a shorter period of time. But the most important thing to note here is that there is a higher risk involved as well, especially if your portfolio of stocks is not diversified across different sectors and markets.
– Pro: Receive regular income – Some types of securities may pay a dividend, which provides a passive stream of income.
– Con: Fluctuation – The prices of securities can fluctuate, sometimes in wide ranges, which can result in a decrease in their market value
– Con: No guaranteed return – Even if you are willing to take risks, securities do not offer a guaranteed return. In a worst-case scenario, not only will the security not generate any returns, but could potentially be worthless.

As such, securities can be attractive if you are willing to take on a certain amount of risk in order to enjoy potentially higher returns. The beauty of trading securities is that you can tailor your investment strategy according to your risk appetite, or invest using an approach like dollar cost averaging.

 

How to trade securities with HSBC

There are a number of brokerage platforms that you can choose from. For instance, you can open a HSBC Securities Trading account, and you’ll be able to access their online platform and trade securities on the go. All orders will be placed directly to the exchange, with your funds/securities debited/ credited on settlement day.

You can trade the following securities on the platform:
– Stocks
– Exchange Traded Funds (ETFs)
– Real Estate Investment Trusts (REITs)
– Global Depository Receipts (GDRs)
– American Depository Receipts (ADRs)*

With just one securities trading account, you’ll be able to trade on the US, Singapore and Hong Kong markets and check on your portfolio at a glance using the enhanced HSBC Wealth Dashboard through Internet Banking.

From now until 28 June 2019, new customers will enjoy 5 free trades. What’s more, existing HSBC Jade, Premier and Advance customers also enjoy promotional brokerage fees until 28 June 2019.

*Excluding French and Italian ADRs

 

What are Unit Trusts?

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 a distributor like HSBC has carefully screened and put on their shelf for you to invest in, instead of choosing the assets one by one yourself.

 

Pros and cons of unit trusts

– Pro: Diversification – Lets you invest in a diversified range of assets with less starting capital. As your money will be pooled with that of other investors in the same unit trust, you can afford to have a more diversified portfolio than you would if you had bought them directly.
– Pro: Professional Management – Instead of agonising over which assets to invest in, why not leave it to investment professionals who spend their careers researching and managing investments? Use their expertise to your advantage.
– Pro: Access to more options – You can gain exposure to countries, regions, sectors and investments that are not easily accessible as an individual.
– Con: Lower relative returns – Your returns may potentially be lower than if you had invested in a single security directly. It’s important to note that there are management fees to factor in.
– Con: No guaranteed return – Like securities, there is no guaranteed return when it comes to unit trusts, so you do risk losing your investment in a worst-case scenario. However, the beauty of diversification is that the performance of your investment isn’t tied to just one security. So in the event that one asset performs poorly, your overall investment might not be as greatly affected because of the other assets in the portfolio.

 

How to invest in unit trusts with HSBC

HSBC has a range of unit trusts that you can invest in through the bank. You first need to set up a Unit Trust Investment account.

Next, browse the range of funds on offer (or get an HSBC representative to explain them to you) and pick the ones you want. You can then instantly purchase them online through online banking or at the branch.

From now until 30 June 2019, enjoy 0% sales charge when you purchase a Regular Savings Plan, or promotional 1% sales charge on lump sum investments when you purchase Unit Trusts online with HSBC.

 

Securities vs Unit Trusts

Here’s a cheatsheet when deciding between securities and unit trusts.

– Securities typically offer higher returns than unit trusts, but at a higher risk.
– Both offer high liquidity, so you can buy and sell your securities or unit trusts with ease.
– Unit trusts offer built-in diversification, whereas with direct securities you’ll have to be careful to build a diversified portfolio by handpicking your own stocks, bonds or other investment assets.
– Unit trusts are professionally managed at a cost, while if you choose to select your own securities, you will have to manage them on your own.

 

So, which is best for you?

As a general rule, if you are relatively young and have some time before you need to cash out your investments, are willing and have the capital to actively manage your own portfolio, you can probably get higher returns investing in securities directly.

If you want to cushion the risk, be more conservative when picking your securities. Don’t want to spend much time managing your portfolio but still wish to enjoy long-term market returns? Some investors simply buy ETFs either with a lump sum purchase or through dollar cost averaging, enjoying passive returns at lower management fees.

On the other hand, if you’re looking for a fuss-free way to invest, diversification with a low investment capital and letting professionals do the analysis and selection for you, you can consider unit trusts. Of course, this comes with lower potential returns coupled with lower risk, compared to direct securities investment.

Remember, there is no one-size-fits-all solution, and for many investors, the answer might be to include both securities and unit trusts in their portfolio.

What is your perspective when it comes to investing in securities and unit trusts? Share them with us here!

 

Personal finance tips delivered to your inbox!

Tags: , ,

Mark Cheng

I rant and rave a lot, but when I'm not busy doing that, I'm managing the content for MoneySmart. I love Singapore, but I also believe in helping it to improve bit by bit, and that's where MoneySmart comes in. Have some thoughts? Drop me an email at [email protected]