Uncovering 5 common myths you’ve heard about Funds, which are also known as Unit Trusts.
Unit Trusts are a popular, yet sometimes misunderstood way to invest. It's not uncommon for people to confuse Unit Trusts with other financial products, such as fixed income products or stock trading. This confusion gives rise to certain myths, such as the idea that Unit Trusts leave your money "stuck" (true of some bonds, but not Unit Trusts), or that Unit Trusts have poor performance (their performance cannot be measured against products with fixed returns).
The truths behind these common myths.
It's hard for regular investors to determine how well their Unit Trusts perform.
It's easy to check the performance of your Unit Trusts, compared to many other products.
Unlike fixed income products such as bonds, Unit Trusts do not provide a fixed return, such as a fixed three per cent or four per cent. Instead, Unit Trusts are measured against a benchmark index.
By comparing Unit Trusts with a benchmark index and seeing if it has outperformed or underperformed the index growth, investors can easily get an up-to-date view of how well their Unit Trusts are doing.
In addition, you can look at the annualised returns of the Unit Trusts over several years. This helps you to measure its performance against other assets.
A Unit Trust is "bad" because it under-performed this year.
Unit Trust performance is accurately measured over time, not by one-off event. To gauge the performance of a Unit Trust, you should look at its annualized (averaged-out) returns, over periods of at least five years.
A Unit Trust may have poor returns on some years, due to factors like economic downturns. For example, a Unit Trust may have provided a negative return last year; but when annualized over a period of 10 years, the same Unit Trust may have provided returns of ten per cent each year.
Always look at the track record of a Unit Trust. Avoid basing your decisions on a single year of good or bad performance.
Your money is "stuck" once you decide to put it in a Unit Trust
A Unit Trust is one of the most flexible investment options available. You can always sell your Unit Trusts if you need your cash back.
It's best to hold on to your Unit Trusts for the long term, to get high annualized returns. However, we understand that emergencies happen. There are situations when you may need to get your cash back.
With Unit Trusts, there's no need to wait for a maturity period, as you would with an endowment plan or Fixed Deposit. There's also no penalty, such as losing the accrued interest, or getting only the surrender value*.
*There is still a risk of capital loss, if the Unit Trust is sold at a lower price than which it was bought.
Unit Trusts are risky.
Unit Trusts offer protection through diversification. The returns of Unit Trusts protect you from inflation-rate risk.
Unit Trusts may be riskier than assets such as Fixed Deposits, or investment grade bonds, but they still carry lower risks as compared to picking your own stocks, as the Unit Trusts are managed by a full-time professional.
Most importantly, Unit Trusts offer diversification. When you invest in a Unit Trust, your money is spread out across different assets. The poor performance of a single asset won't derail your financial plans.
It's also important to consider inflation-rate risk. While investments such as Fixed Deposits or bonds may have an apparent lower risk, they have low returns. As such, they're quickly eroded by inflation.
Therefore, Unit Trusts should be used to complement defensive assets, such as simple cash savings - they protect your wealth from inflation-rate risk, by growing faster than the cost of living can rise.
All Unit Trusts are the same. Just buy any random one and forget about it
There's no such thing as "one-size-fits-all" when it comes to investing. Investing is a highly personal, ongoing journey.
Different Unit Trusts offer exposure to different types of assets. Some Unit Trusts focus more on stocks (equity funds), some on fixed income assets (bond funds), and some will emphasize commodities or even Forex.
It's important to consult with your wealth planning specialist on which type of Unit Trust best suits your financial goals. You must be comfortable with the risks and rewards of your Unit Trusts over the long term.
As your circumstances change over the years – such as by having a child or coming closer to retirement –your goals will also be altered. It's important to change the Unit Trusts in your portfolio to match your new situation. You should review such investments every six months, or after every major life change.
Risk Disclosure and Important Notice
The information herein is for information only. DBS accepts no liability whatsoever for any direct, indirect or consequential losses or damages arising from or in connection with the use or reliance of this publication or its contents
Investment involves risks. The information provided is based on sources which DBS Bank Ltd. and DBS Bank (Hong Kong) Limited believe to be reliable but has not been independently verified. Any projections and opinions expressed herein are expressed solely as general market commentary and do not constitute solicitation, recommendation, investment advice, or guaranteed return. The above information does not constitute any offer or solicitation of offer to subscribe, transact or redeem any investment product. Past performances are not indicative of future performances. You should make investment decisions based on your own investment objective and experience, financial situation and particular needs. You should carefully read the product offering documentation, the account terms and conditions and the product terms and conditions for detailed product information and risk factors prior to making any investment. If you have any doubt on this material or any product offering documentation, you should seek independent professional advice.
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