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Are Singapore Investors Getting The Short End of the Stick with Unit Trusts and Mutual Funds?

At Motley Fool Singapore, we champion investing in individual shares of solidly profitable companies as one of the best ways to build long-term wealth. But, there are also other ways to invest in the stock market.

Passive index trackers like the SPDR Straits Times Index Exchange Traded Fund (SGX: ES3) and Nikko AM Singapore STI Exchange Traded Fund (SGX: G3B) allow investors to participate in Singapore’s overall stock-market growth by mimicking the returns of the Straits Times Index (SGX: ^STI).

On the other hand, investors can also invest with unit trusts and mutual funds that are managed by professional money managers. Such funds are also known as active-funds because the fund managers attempt to pick individual stocks or other investment vehicles in a quest to beat a broad stock market index like the STI.

For those investors, they have a few things to think about. First, they have to ponder over their choice of actively-managed funds because the odds of picking one that can deliver better returns than the market are surprisingly low, with the main culprit being the high total expenses associated with such funds which eats into investor-returns. The next issue concerns their overall experience with the funds before, during, and after the purchase.

It might not be surprising for investors to not think about issues such as; the level of regulation those funds are subjected to, to protect investors; the level of disclosure in the information disseminated by a fund that can help investors better understand all the financial and investing-related aspects of it; or the amount of fees and expenses that investors have to pay. But, these issues are important as they are likely to affect investors’ subsequent returns.

Morningstar (NASDAQ: MORN), a provider of stock-market research, recently released its biennial Global Fund Investor Experience 2013 report which helped shed some light on such issues.

The report aims to “encourage dialogue about global best practices for mutual funds from the perspective of fund shareholders,” and measures the experiences of fund (the word ‘fund’ would mean mutual funds and unit trusts from now on – ETF investors were not part of the study) investors in 24 countries – in the continents of North America, Africa, Europe and Asia – based on four categories: 1) Regulation & Taxation, 2) Disclosure, 3) Fees & Expenses and 4) Sales & Media.

The categories are given their individual scores from ‘A’ (best) to ‘F’ (worst) and the scores are then combined for an overall grade.

Singapore, which was included in the study, saw its overall score drop from ‘A’ two years ago to ‘B’.

In particular, Morningstar was impressed with our tax-free environment for fund investors (unlike countries such as the USA where investors are taxed on capital gains) as well as the presence of a single, independent, regulator in the Monetary Authority of Singapore. For that, Singapore was given an ‘A’ for Regulation & Taxation.

But, the report was critical with the Fees & Expenses that local investors are subjected to and the category received a ‘C’ score. For example, equity-based funds available for local investors have expenses ranging from 1.72% to 1.94%. In contrast, the top-scoring nations, USA, Australia and Thailand, have expense ratios ranging from 0.82% to 1.76%.

Singapore was fairly decent in the other two categories, scoring a ‘B’ for Disclosure and a ‘B-‘ for Sales & Media. With an overall score of ‘B’, at the very least, it does seem that local investors are not getting the short end of the stick.

But, that does not mean investors should not do their own research on the funds they are interested in. We’ve shared before how important it is for investors to have to get their own hands dirty even if they choose to have their money managed by fund managers – because, as it is with all investments, it pays to know what you’re getting yourself into.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.