How Safe Are Unit Trusts? We Tell You More.
The nerves of many local investors have been badly rattled of late. The bankruptcy of Lehman Brothers, and the mini bonds saga that followed, gave investors of the Lehman Brothers mini bonds a rude awakening, as they saw their investments reduced to nothing but worthless scraps of paper.
One fundamental rule of investing: Always know what you are buying into. If you know next to nothing about what you are investing in, do not buy into it, no matter how enticing the returns may seem, or how persuasive the personal banker may sound!
At Fundsupermart.com, we advocate unit trust investments, of course. But we are also strong proponents of investor education – one of our primary responsibilities is to ensure that investors know what they are investing in, and are able to make profitable investment decisions in the long run. In this article, we tell you more about the advantages and disadvantages of unit trust investing, and the risk control measures behind unit trusts.
In A Nutshell: Advantages & Disadvantages of Unit Trusts
By now, investors should be well-acquainted with the numerous benefits of unit trusts. Diversification, economies of scale, professional management and liquidity are the main benefits of unit trusts. For example, for a minimum sum of S$1,000, an investor can stretch his or her dollar, and be invested in a global, regional, or single country equity fund.
But as with any form of investments, unit trusts have their own set of risk and disadvantages as well.
The returns from your unit trust investments do fluctuate according to market conditions. Thus, there is always the possibility that the value of your investments would depreciate. Unit trusts are professionally managed instruments, but it does come at a cost to investors. Upfront sales charges, annual management fees and expense ratios are costs that investors have to take into account. The management fees and expense ratios vary from fund to fund.
Having run through some of the main advantages and disadvantages of unit trusts, let’s take a closer look at the risk control measures behind them.
Understanding How A Trustee Works
The assets of a fund are taken into custody, and held by a trustee. In accordance with the duties and responsibilities of a trustee of a fund, trustees are required, but not limited to:
- take into custody or control all the property of the fund and hold the property on trust for the participants
- ensure that all the property of the fund is properly accounted for
- keep and maintain a register of the participants of the fund
By holding on to the assets of the fund, the trustee functions as a third-party ‘safety net’ for investors.
However, this safety net is not 100% “fool-proof” either. A trustee can also become insolvent . In the event that the trustee of a fund becomes insolvent , the trustee is not allowed to use the investors’ holdings and monies to offset the trustee’s debts. The fund manager will appoint another approved trustee to take over as the new trustee.
Will I Get My Money Back If The Fund House Winds Up?
Investors need not worry about their investments, in the event a fund house ceases its operations.
The assets of unit trusts are held separately on trust by the trustee for the benefit of the unit holders. In the event that the fund manager goes into liquidation, a meeting will be called by either the manager or the trustee for the purpose of determining an appropriate course of action.
If a resolution is passed at the meeting, the trustee will take the necessary steps to wind up the fund. The trustee then has to ensure that the resultant proceeds have been distributed to participants in the same proportion as their holdings of units.
What Happens If iFAST Financial Ceases Operations?
Fundsupermart.com is the online unit trust distribution arm of iFAST Financial Pte Ltd (iFAST).
iFAST is licensed to provide custodial services for unit trusts and Singapore Government Securities (SGS). Custodial services include the safeguarding and administration of client assets and are subjected to regulatory requirements in the provision of such services. The unit trusts investments are registered in the name of iFAST Financial Pte Ltd – Client Trust . These units are segregated from the company’s assets.
In the unlikely event that iFAST Financial Pte Ltd winds up, iFAST will ensure that all liabilities and obligations to all clients have been fully discharged or provided for, and that proper arrangements have been put in place to ensure that our clients continue to be serviced by another licensed distributor. As for the cash account monies, it will be returned to the clients.
Investing in Unit Trusts Is A ‘Safe Yet Risky’ Affair
At the end of this article, we hope to reassure investors that there are various ‘safety mechanisms’ in place for unit trusts, notwithstanding the fact that there are inherent risks to unit trust investing (potential depreciation in value of investments), as with any other form of investments.
The important thing would be for investors to do their research and homework, to understand what they are buying into, and to have a good appreciation of the risks and returns involved in making any investment.
Stephanie Thng (Editor) is part of the Editorial team at iFAST Financial Pte Ltd.
iFAST and/or its licensed financial adviser representatives may own or have positions in the funds of any of the asset management firms or fund houses mentioned or referred to in the article, or any unit trusts or Singapore Government Securities bonds related thereto, and may from time to time add or dispose of, or may be materially interested in any such unit trusts or Singapore Government Securities bonds. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
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