Perhaps you can’t really blame Singaporeans for not being more proactive in investing. Just reading through a list of investment products is enough to make anyone’s head spin. This could, in part, contribute to a degree of hesitancy to start growing one’s money.
Over the past year, we’ve seen SGX lower the lot sizes for stocks and bonds so that more people can get access to investing without having to dump a fortune just to get started.
We’ve also seen the proliferation of Regular Savings Plans (RSP), allowing Singaporeans to reap the benefits of dollar-cost averaging and not have to part with so much cash upfront. RSPs take the worry and (over)thinking out of the investment process, and that has proven to be the most popular starting point for most beginners (yours truly included).
What do we invest in then? If you don’t know where to start in terms of building your own portfolio of individual stocks or bonds, unit trusts are a great way to get a broad exposure to the market.
So What are Unit Trusts?
Very simply, a unit trust is a fund that is grown by pooling together money from different investors, like you and I, and invested in a portfolio of assets. The fund is managed by a fund manager, which could also be an institution or group.
You invest by buying units in the fund. When the prices of the units increase above the price you paid, that’s when there is capital gain. The key number here is the Net Asset Value (NAV), which is used to calculate the price of each unit you are buying. The price is determined by dividing the NAV by the number of units outstanding, and the NAV itself is determined by the market value of the fund’s net assets, which include its investments, cash and other assets minus expenses, payables and other liabilities.
Why Should You Consider Unit Trusts?
A key advantage of investing in unit trusts is diversification as the funds are invested in a wide range of different assets.
Because of a fund’s diversified portfolio, a single asset’s underperformance is unlikely to affect your investment very negatively as compared to investing in individual stocks. In the current volatile market, this robustness helps investors to weather the ups and downs without having to worry too much about whether the performance of one stock is going to affect them greatly.
In general, unit trusts provide a lower barrier to entry to a wide range of investment assets while providing you with more of safety net in terms of the performance of your investment.
What Should You Look Out For?
As mentioned earlier, funds have different investment objectives, not just in terms of risk and return, but also in terms of their area of investments. Some funds may be invested in emerging markets, others may choose to invest purely in assets associated with climate change or renewable resources.
Whatever the case, these funds will use different investment strategies to reach their goal. As we have pointed out before, it’s important to understand what sort of investor you are and align your investment goals and strategies with the funds you are investing in. Here’s a rough summary of the risk and return of different funds from MoneySense:
As they’ve mentioned, the chart above is for general guidance only. Bond funds may not necessarily be safer than funds that invest in blue chip stocks, especially if the fund focuses on emerging market government bonds or high yield corporate bonds. This is due to the fact that high yield corporate bonds may expose the fund to significant credit risks.
Of course, there are many other factors in play when choosing a fund to invest in, and doing some homework is crucial, which brings us to…
How Can You Buy Unit Trusts?
Besides cash, you can invest in funds via the Supplementary Retirement Scheme (SRS) or the CPF Investment Scheme (CPFIS), which we have written about before. But there are also a bunch of other ways you can invest in unit trusts, even via investment-linked insurance policies.
There are also investment brokerages that will help you to shape your portfolio as well. But if you don’t want to pay the fees and would rather use a self-serve online platform, what should you look out for? Here are some suggestions:
1. Ease of use
Having an interface that distracts with tons of overly complicated charts and numbers isn’t going to instill any sort of confidence in taking that first step towards investing. Stay tuned with us on Facebook as we delve deeper into such comparisons.
You’d also probably want to look for an account that is easy to start up, without having to jump through too many hoops just to get your first purchase going. Having an interface that is simple will then help you to easily get started without bombarding you with all sorts of irrelevant information.
2. Relevant Information
This is tricky, because relevance is subjective. What you do want is information that isn’t too overwhelming, but will help you make a good decision on whether to buy into a fund or not.
Platforms like OCBC’s new online unit trusts investment platform not only have a list of recommended funds, but they also provide you with alerts on the performance of your investments to help you to make more contextualised decisions. This allows you to set certain markers for yourself, which will then help you to decide what to do with your portfolio based on your own investment goals.
The interface also provides you with quick summaries of your portfolio and performance charts so that you get a good overview at a glance.
Being able to invest your money in different ways is important, especially for beginners who don’t have a lot of cash to just splash out at one shot. Going back to the OCBC platform, you can start from as low as $100 in monthly investments and that allows you to diversify your portfolio without committing what would usually cost thousands of dollars.
Also, the best part is that, like we mentioned earlier, the platform even allows you to invest via SRS or CPFIS, apart from using cash, so you have a number of options to choose from when making your investment purchases.
This article was brought to you by OCBC. To find out more about investing in unit trusts on OCBC’s Online Banking platform, click here.