Ho, Ho, Ho, it is the time of the year to be merry and spend to reward yourself for working a long, hard year and also buy gifts to pamper yourself and your loved ones. At least, that is what retailers and marketing ads want us to do.

Pause a little, are we spending and enjoying too much for the present moment, and neglect to save for our future? Do we still remember the benefits of delayed gratification and a dollar saved is a dollar earned?

Well, instead of Christmas and year end shopping for clothes, electronics, etc. Why not consider year end Christmas shopping for Unit Trusts (UTs) especially if you have made your Supplementary Retirement Scheme (SRS) contribution for this year. Instead of buying expensive toys for your child, consider saving some money into UT for your child’s future needs. Instead of paying thousands of dollars for expensive overseas tours, consider other tourists have spent thousands visiting our country and our attractions especially our Botanic gardens that has won the UNESCO World Heritage Award. Why not save the thousands of dollars and bring them for a unique SG islandwide tour?

If you agree with some of the points earlier, I will also share more reasons of why people buy UTs in Singapore. This article is extracted from my bestselling book Huat Ah! Building wealth in Singapore with Unit Trusts, now available at all good bookstores in Singapore.  I will share 6 out of the 11 points found in the book, first 3 points in part 1 and the last 3 points in the next post.

A. Lack of time and knowledge

As all investment decisions (what, when, at what price and how much to buy and sell) are all made by a professional unit trust (UT) fund manager with analysts’ inputs; all the investor needs to do is to select a UT with an investment objective that he or she understands and is confident will appreciate in the near future. Many working adults cite this as one of their top reasons for investing in UTs.

To address the lack of time and knowledge, some investors chose to buy UT via a representative, like myself. The investor will have fewer choices to make as the licensed professional representative would have shortlisted, filtered out and made recommendations on suitable UTs after a round of fact-finding to better understand the investor’s objectives, risk appetite, investment time horizon and current portfolio, etc.

To overcome a lack of knowledge, investors can read investment books, download free research articles, and attend free educational seminars and talks from online UT platforms. Investors will then be poised to make more informed decisions once they have greater knowledge of current affairs and economic news, as well as an understanding of a UT’s investment philosophy, top holdings and geographical regions.

B. Diversification

Many investors prefer UT over stocks for its diversification benefits for the same amount of capital invested. A typical regional equity UT can have exposure to equities in more than eight countries. Country diversification is important as there may be country specific risks like political crisis, interest rate risk, currency risks, economic risks due to natural disaster, etc.

Hence by investing in a UT with exposure to several countries, specific country risks are greatly reduced. Regional- and country-specific UTs also enjoy sector diversification benefits: they can have exposure to over six different sectors of the economy. The usual heavyweight sectors in most UTs are financials, consumer discretionary, IT, healthcare, etc.

When the investor invests in a UT, he/she trusts the fund manager to be up-to-date on the news affecting the different sectors of the economy in the country and act to grow the value of the UT and consequently the UT’s NAV per unit. The benefits of good sector diversification are important as different sectors of the economy perform better during different market phases. All these diversification benefits from only $1,000/fund to get started. Unbelievable!

 C. Clear and independent structure

UTs that are marketed for sale in Singapore are established by a trust deed, which sets out the roles and parties in the UT structure. With the trustee and auditors independent of the fund managers keeping close tabs on where, what, why and how the fund manager manages the monies and complies within the fund mandate and investment objectives, investors can sleep better knowing that checks and controls are in place.

The setup of the roles and parties in the UT structure gives it an edge over individual company securities. Consider the regularity with which the public hears about frauds, rigging, accounting scandals, etc. taking place, even in big listed organisations. It is less likely with UTs. Even if one of the security within the UT is investigated for suspected fraud or mis-managements, and comprise a substantial percentage (assuming 8% of the total UT assets which is already very rare, unless it is an emerging market single country UT), the UT’s NAV may just drop slightly as they still have 92% of the UT’s AUM in other securities. The only exception is an industry-wide or sector-wide fraud. In such a case the UT’s NAV obviously will take more of a beating.

Selling UTs in Singapore is a highly regulated activity by the Monetary Authority of Singapore (MAS) as representatives of Financial Advisors have to pass exams and be of good financial standing and good moral integrity. Sellers of other types of investments, like land banking, wine investments and other forms of multi-level marketing products are definitely much lesser regulated.

—-Stay tuned for Part 2. Merry Christmas to you and your loved ones. 🙂