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Index Funds, Unit Trusts or Individual Stocks – Part II

Unit trusts are one of the more popular investment vehicles in Singapore. However, after talking to some of my friends who have bought into the scheme, I realise that many of them do not really know the pros and cons of unit trusts or the alternatives available to them.

They simply follow the advice of financial advisors or personal bankers whom, in reality, have a strong incentive to encourage them to buy unit trusts from them.

As such, I thought it may be a good time for us to dive into some of the advantages or disadvantages of buying unit trusts as an investment. This is also the second part of my three-part series on investment vehicles. In the first article, I discussed the pros and cons of index funds. The final article will show the reasons for managing your own stock portfolio.

What are unit trusts?

Unit trusts or mutual funds are funds that are actively managed by fund managers who pick stocks within the stipulated criteria of the fund. Investors can buy individual units of these trusts and can earn profits as the trust appreciates in value, depending on the performance of the stocks in the trust.

Unlike index funds, unit trusts charge higher management fees as fund managers are tasked to actively look out for stocks that can beat the market. Their main target is to try to beat the market.

Key advantages

  • There is a chance that you can achieve market-beating returns

Unlike investing in index funds, unit trusts are specifically set out to try and beat the returns of the market. Fund managers are tasked with finding stocks that can outperform the index.

  • Professional fund manager

By buying a unit trust, you need not monitor your stocks individually or scour through annual reports looking for good investments. Fund managers are paid to do exactly that and investors need not worry too much about the stock market until they want to cash out their investments.

  • Wide range of different unit trusts to choose from

There are numerous unit trusts in the market that investors can choose from. Some are focused on dividend stocks, while others may have a preference for growth or value stocks. Investors can choose a unit trust based on their financial goals or temperament.

Disadvantages

  • May return less than the market

Most unit trusts are unable to outperform their respective index due to the high management fees. Investors must, therefore, choose their unit trust wisely.

  • Additional charges can further eat into profits

Investing in unit trusts is more costly than index funds or managing your own portfolio. The sales and commission charges will eat into your profits and can further dampen your returns.

  • No say on the stocks invested in

By investing in a unit trust, you have entrusted a manager to manage your money. Being a retail investor, you have little influence over the stocks that they buy.

The Foolish bottom line

Unit trusts are one of the many ways investors can gain exposure to the stock market. If you are unable to manage your stock portfolio personally, unit trusts may be a good way to invest.

Having said that, there is indeed a fair share of disadvantages of investing in unit trusts. Investors, should, therefore, familiarise themselves with all other investing options to be able to find which vehicle suits them the best.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

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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 Jeremy Chia doesn't own shares in any companies mentioned.