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What is a Unit Trust?


A unit trust refers to a collective investment scheme which pools money from individual investors to invest in different financial instruments such as equities, fixed income and others, depending on the investment objectives. It is set up under a trust deed and is managed according to pre-set investment objectives by professional fund managers. Investors in unit trusts are called unitholders and are effectively the trusts’ beneficiaries.


Why Invest in Unit Trusts?


Wealth Accumulation

A unit trust is an investment vehicle which aims to help investors accumulate wealth on a medium- to long-term basis. Through unit trusts, investors will invest indirectly into a range of asset classes including stocks and bonds so as to enjoy potential returns from those underlying assets. As there are many unit trusts available in the market, investors are encouraged to take into account their investment objectives, investment horizon, risk-return profile, and other considerations before making an investment decision.


Diversification

The large pool of funds collected by unit trusts enables fund managers to diversify investments across different countries/sectors/asset classes and minimise unsystematic risk. Unsystematic risk or company-specific risk is inherent in each investment and only affects one company or a small group of companies, mostly coming from a company’s operation and business environment. Unlike systematic risk or market risk which is un-diversifiable, the amount of unsystematic risk can be reduced by holding a portfolio of securities. As a unit trust in general holds more than 25 securities, investing in unit trusts can achieve diversification which may not be readily available to individual investors.


Professional Investment Management

Investors can save time and hassle investigating and studying specific securities by having full-time professional fund managers to manage their investments. Fund managers perform holistic research and analysis on market trends, sectors, and specific securities, and pick the best securities for the portfolios they manage based on their findings.


Convenience

Most unit trusts are traded daily and open-ended, with creation and redemption of units occurring on a continuing basis. As unit trust has only one price per day and is mostly open-ended, unit trust investment is considered much more convenient than stock investment because no order-matching is required. In addition, a number of channels are available for subscribing to (or redeeming from) unit trusts, such as through your relationship manager, independent financial advisor, unit trust distributor or via the internet.


Affordable Minimum Investment

Unit trusts generally hold a large number of securities. It can be too expensive for an investor to replicate such a portfolio, even at a minimum size of one lot. However, by investing into a unit trust, the investment becomes affordable as monies are pooled from a group of investors. In general, the minimum initial investment in a retail fund can be as low as HK$10,000 or US$2,000.


Access to Global Investment Opportunities

Owing to certain regulations, investors may be restricted from making investments overseas. However, by investing into a unit trust, investors are offered an opportunity to access and invest into worldwide securities which may otherwise not be available.



Common Types of Asset Classes


Unit trusts usually invest into two types of financial instruments: equities and fixed income. Some unit trusts may also invest into other asset classes like money markets, warrants, or derivatives, or combine different asset classes to form a blended unit trust. Here are the characteristics of the two most common types of asset class, at a glance.


Equities


Definition

A stock or any other security representing an ownership interest in a limited liability company.


Suitability

Risk-taker


Investment Period

Medium to long term


Risk-Return Profile

  • Return generated mainly from capital appreciation, sometimes from dividend. However, yields from dividend paying stocks are relatively lower than those from bonds
  • Usually greater returns than bonds
  • Return depends on a number of factors including but not limited to company earnings, industry outlook, and corporate governance
  • Higher volatility

Fixed Income


Definition

A financial instrument that provides a regular periodic payment and the return of principal at maturity. Common types of fixed income include fixed and floating rate bonds, zero coupon bonds, and discount bonds


Suitability

Medium risk-taker


Investment Period

Medium to long term


Risk-Return Profile

  • Return generated from regular income and potential capital appreciation
  • Steady income flow
  • Return depends on a number of factors including but not limited to credit rating, issuers’ quality
  • Lower volatility


What Should an Investor Do before Investing in a Unit Trust?


  1. Set an investment objective. Before making any investment decision, you should have in mind an investment objective, be it wealth accumulation, retirement, family protection, your child’s education, or special occasions like wedding or buying a house. You should also set a targeted return you want to achieve from investing unit trust, e.g. capital appreciation or capital preservation. Knowing your own investment objectives better will help you to select the most suitable unit trust.

  2. Evaluate your financial situation. Before making any investment decision, you should take stock of your current financial situation, how much you can spare each month, and how you would like to invest. You may also need to consider the mode of investment which suits you most, e.g. lump sum or regular payment.

  3. Decide your investment horizon. The unit trust is an investment tool suitable for those looking for a medium to long-term investment opportunity.

  4. Understand your risk tolerance level. Depending on the asset class/country/sector into which a unit trust invests, different unit trusts may come with different risk levels. In principle, if you want to enjoy a higher rate of return, you must accept a higher level of risk. Therefore, you should consider your risk appetite and strike a balance between risk and return.

  5. Do not overconcentrate. It is highly recommended not to put all your money in one basket. Diversification, by spreading investments over a range of low-, medium-, and high-risk unit trusts for example, can help mitigate risk.

  6. Appoint a trustworthy financial advisor. As there are over 1,800 unit trusts and mutual funds available in the market, it can be very difficult to select the unit trust that best suits you. In this case, you may consider consulting a financial advisor to make recommendations after communicating clearly your needs and considerations.

  7. Select a reputable asset management company. It is advised to select an experienced and reputable asset management company. Though track record may be a good reference point, you should take note that past performance is not indicative of future performance.

  8. Be an informed investor. You should not make an investment decision without understanding the features of the unit trust you are going to invest in. Such features include but are not limited to investment objective, investable universe, investment capability and key risks.

  9. Choose your preferred unit trust. Before making any investment decision, you should understand the merits or demerits of the unit trust you are interested in. Then, based on your preset investment objectives, targeted return, affordability, investment horizon, and risk tolerance level etc., select the unit trust that suits you most.

  10. Keep monitoring. You are advised to review your investment portfolio on a regular basis, and rebalance it if it is beneficial to do so. Seek assistance if needed.

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