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 4: Find out what fees are involved
Fees are unavoidable costs which will eat into your returns
To get a better understanding of how fees can affect your overall returns, let’s study the following case:
Rule of 72:
This rule provides a simple way for us to understand how long it takes for someone to double their investment. Assuming a fixed annual rate of return of x%, it takes approximately 72÷x years to double your investment. Let’s take an example where you have an 8% annual return. In this scenario, it would take you 9 years to double your money.
Now, let’s examine what would happen if you were paying an annual fee of 2%. This would reduce your return from 8% to 6% and as a result, it would take you 12 years to double your investment, instead.
See the graph below: Because of fees, your investment will need 3 extra years to double!
Be very careful and consider all the available options before you incur any fees. Also, avoid switching from one fund to another because doing this will eat into your money even more thanks to Transfer and Switching charges.
Unit trust fees are typically made up of:
- An Upfront Sales Fee
- A Management Fee
- Transfer, Switching, and Redemption Charges
Under ‘Summary’, we talked about the Expense Ratio. The Expense Ratio roughly tells you what fees you’ll be paying to invest in the fund you’ve chosen for yourself. You can look up the total Expense Ratios and other fees easily with Morningstar, just by going to Fund Tools, then Funds to Explore, and click on the Nuts and Bolts tab.
Clicking on any one of the columns will sort them out for you from highest to lowest and vice versa. If you’re not sure which one to look at, you can just use the Total Expense Ratio column.
Please note that brokerage fees and transaction costs are NOT included in the Expense Ratio.