How do you choose the right unit trust for you?
7 TIPS ON INVESTING IN UNIT TRUSTS
- Compare returns to its relevant index
- Watch out for high fees
- Don’t time the market
- If you choose to invest in unit trusts, hold for the long term
- There is always a risk of losing money
- Don’t forget to diversify your investments
- Remember, unit trust companies and consultants are there to sell you a product. It’s up to you to do your own research
- Quiz: Unit Trust
Step 2: See how much risk the fund carries
With greater risk comes the potential for greater returns, but also the potential for greater losses. The important thing here is to decide how much risk you’re comfortable taking on and then choosing the unit trust fund that matches your risk appetite.
What does higher risk look like? As shown in the graph below, taking on higher risk means that your returns can fluctuate a lot, just like being on a rollercoaster ride.
Carrying lower risk on the other hand means that your returns are less volatile, which also means that you’re unlikely to achieve the same high returns (demonstrated by the yellow line).
- Equity funds carry the highest amount of risk because they invest money in the shares of companies, and these can sometimes be volatile (meaning they can go up and down a lot)
- Fixed income funds carry the lowest amount of risk because they invest mainly in bonds (like government or corporate bonds) and money market instruments (investments that generate profit through interest rates)
- Balanced funds are just as the name suggests: they are a combination of equities, fixed income and money market assets, and therefore carry less risk compared to equity funds.
Below are some graphs with real data we’ve taken from an Equity and Fixed income fund. As you can see from the graph, the equity fund goes up and down more than a fixed income fund.
Fixed Income fund:
To know the risk of a particular unit trust, ask your unit trust consultant for the ‘risk level’ of the fund or ask the consultant for the fund prospectus or fund summary. This document should include a graph of the fund’s price chart and with it, you’ll be able to look at the fund’s pattern of historical returns to see for yourself just how much its returns go up and down.
It’s also important to consider your age when figuring out your risk preference. Older investors should take on less risk because if an investment goes bad, they’ll have fewer years to work and bounce back from any losses they suffer.