How to invest in unit trusts in Singapore?

Investing in unit trusts has long been a popular investment method amongst Singaporeans. There are several significant benefits to this investment method, including convenience and diversification. Investing in unit trusts enables the investor to spread the risk associated with any one particular stock or market index. And it also offers exposure to markets that an individual investor may find difficult or expensive to access on their own.

However,  it is essential for investors of all levels to know how to best go about investing in this manner. A crucial part is understanding what a unit trust is and what sets it apart from other investments. Though there are many types of unit trusts, they all share a common principle.  As pooling together the resources of many investors to invest in a specific market. It reduces the risk for individual investors. Also, it provides access to markets that would otherwise be far more difficult or expensive to access by oneself.

Several different varieties of unit trusts

Unit trusts come in several different varieties with varying degrees of complexity and risk. While most unit trusts carry a certain degree of risk, there is a wide variety from which one can choose. A good place for prospective investors to start is to explain how each type works to determine which best suits them as they move forward with the decision-making process.

Open-end funds

The first type of unit trust is the most popular amongst investors, and that term is “Open-end funds”. Open-end funds are not new units created when someone invests money into the fund. Instead, they are units sold to prospective buyers. The price of existing units is based on their value relative to the net asset value (NAV) of all of the fund’s assets divided by its number of outstanding units.

This NAV is calculated every business day after the market closes with an open-end fund. For investors who wish for more control over how much they pay for a particular unit, there exist closed-end funds as well. However, the price of these funds is more volatile as they are not tied to the NAV.

Venture capital funds and hedge funds

On the other hand, venture capital funds and hedge funds do not follow the first two types as their investment strategies. And their operations differ significantly from those of mutual or common trust funds. Venture capital funds invest mainly in startup companies and small businesses with potential.

In contrast, hedge funds allow for leveraging and shorting on various markets. And it is generally prohibited amongst unit trusts. These structures minimize risk in both cases by only investing in specific markets or sectors. Where there is a reasonable degree of confidence that gains elsewhere in the fund will offset any loss.

Index-tracking funds

The last type that falls under this category is index-tracking funds, which seek to mimic an index’s performance. These funds attempt to mimic an index’s composition and weighting to replicate its returns over time. Theoretically, they should provide investors with similar results. As owning the actual securities contained in the index, minus fees and expenses.

Bottom line

Many people invest in unit trusts for one reason: convenience. Rather than scrutinizing individual companies or markets and making well-informed decisions about the potential gains and risks. Investors can feel secure that their money is diversified across several different ones via a single investment into a unit trust fund. It reduces risk and provides easy access to assets. And that would otherwise be near impossible for many individuals to buy independently. Whether due to high capital requirements, regulatory barriers to entry, costly fees, or simply because they are not well-versed in the market.

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