Should You Invest in Singapore Mutual Funds or Unit Trusts?

Marcus Neo
Marcus Neo

Ever had a financial consultant friend ring you up out of nowhere and asking you to ‘invest’ your money?

When you invest through a pre-packaged financial plan, you’re mostly dealing with mutual funds and unit trusts.

If you’re Singaporean, you probably heard from your parents growing up to save more money. If you talk to your more financially savvy friends, you’ll hear them talk about ‘investing’. You know that finances are a hot topic, especially in Singapore, one of the costliest cities in the world.

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For many average Singapore, investing in unit trusts and mutual funds through financial advisor are deemed safer ways to grow your money.

However, let’s take a look at the real numbers behind mutual funds and unit trusts.

What Exactly are Mutual Funds or Units Trust?

Investing in a mutual fund is like purchasing a slice of a big cake. The unit trust can also be termed as a mutual fund. In short, the mutual fund is a pool of cash, gathered different various individual or group of investors. They are then invested in stocks, bonds and other securities.

Their investment approach can be based on a specific investment methodology, country, asset classes or a combination of it.

This allows retail investors like you to own a portfolio of stocks without actively monitor your portfolio as the fund managers would manage on their behalf.

  • Diversification of Risk in Mutual Funds

Through mutual funds, Investors can invest in loads or multi-asset classes of stocks, bonds to money markets. However, diversification doesn’t mean lower risk. They all carry risk to a certain extent. In most cases, the higher the risk, the higher the potential return, the less likely it will achieve a higher return.

The fund manager gets a share according to the ratio of his investment in relation to the total value and has the power of the fund’s gains, losses, income and expenses.

Your Real Investment Returns behind Mutual Funds and Unit Trusts

The reasons why mutual funds are found everywhere in Singapore is that these mutual funds are profitable to both the fund managers and the financial advisors selling it. You need do your research to know what you are investing in instead of blindly going into it.

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Okay, let’s use some math.

Amount Invested: $60000

Typical ILP Plan of Insurance Company:

5% initial charge:                                                                                             $3000
1.5% annual charge:                                                                                         $900

1.5% compounded charge over 10 years:                                                    $9632

Total charges =                                                                                                 $13532

Singapore SPDR ETF Index fund charges: 

0% initial charge:                                                                                             $0
0.30% annual charge:                                                                                     $180

0.30% compounded charges over 10 years =                                             $1824

Total charges =                                                                                                 $2004

That’s a $10000 difference in charges compounded over 10 years.

Can Mutual Funds/ Units Trust Fund Managers Beat the Market?

The reason why most mutual funds and unit trust fund managers do not beat the market is because of costs and expenses.

The common financial term used to measure cost is: expense ratio.

Expense Ratio:

Nikko AM STI ETF:                            0.35%
Robo Advisors:                                    0.2 – 0.8%
Mutual Fund, Unit Trust:                  1-3%

Not to mention the numerous amounts of charges you pay to get to invest in a fund from initial service charges, realization redemption fee, switching fee and administration charges. There’s also the management fee, the trustee fee and other miscellaneous fees.

There’s a study they did in 2002 where they studied the performance of 294 mutual funds. There isn’t any superior performance in the funds performance after advertising costs. 66% of large-cap mutual fund managers failed to beat the S&P 500 in 2016.

In conclusion: the majority of mutual/ unit funds fail to beat the market. You’re paying them hefty fees to underperform on your investment.

Should You Purchase Mutual Funds and Unit Trusts in Singapore?

If you’re planning to invest and are just starting out. There are a ton of funds for you choose and lots technicalities to understand.

Here are the couple of things that every investor should know before investing in mutual funds.

  • Front Load: Usually up front charge at the time of acquisition and usually up to 5% and up, of the total amount advanced.
  • Back Load: They are charged only when you trade a trust and are also known as deferred sales charge.
  • No Load/Load Waived: Generally, this type of expense charge you nothing.
  • Expense Ratio: All the funds have some underlying expenses, though not all funds charger loads.

Performance Is Not a Guarantee of Future Results 

You should reflect on the 10-year average past performance before buying. There may be financial advisors that tell you:

‘Our investment fund did 40% returns last year!’

Yeah right…. how about the last 10 years? Investing is a drawn-out game, just because you did 40% last year does NOT mean you did the same returns for the 4 years before. Show me your average annualized returns. Show me your fund charges. Show me the hidden costs.

Like I mentioned, the majority of mutual funds and investment funds do NOT outperform the market.

Mutual Fund Singapore

If you take a close look here, this fund (as of 2018), has returned 2.99% for the last 10 year AFTER CHARGES. Compare this to the SPDR STI ETF performance, the SPDR STI ETF has returned 4.04% annually over the last 10 years.

Data as of September 10th 2018.

When Should You Invest in Mutual Funds and Unit Trusts?

  • Mutual Funds/ Unit Trust Investment Results Can Beat Fixed Deposits Returns

You can consider mutual funds grow to beat other forms of investing such as guaranteed schemes, fixed deposits or certificates of deposit.

  • You Aren’t Discipline Enough

If you’re too afraid to click a buy or sell button through a brokerage or just do not have the discipline to dollar cost average or lump sum invest in an index fund, investing in a mutual fund through a financial advisor can be ideal. Your returns can be better than putting your money in the bank.

  • You Require a Personal Touch

For years and years, my parents relied on a financial advisor for the last decade. They still compounded their CPF accounts returns at a lower rate. Some people require a personal touch through a financial advisor. There’s nothing wrong with that.

Closing Thoughts on Investing in Mutual Funds/ Unit Trusts

Ultimately, you need to set out goals for your investments.

Some things to consider:

  • Your risk appetite (are you able to take temporary losses?)
  • Your investment period (short versus long-term)
  • Your desired investment returns
  • The cost of investment: taxes, charges and expenses

Lastly I wouldn’t recommend you to go with mutual funds or unit trusts. You can effortlessly outperform your investments by investing in an index fund. Getting yourself financially educated isn’t that difficult.

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You can check out our ultimate guides here:

This a guide for the beginner investor who wants to grow his or her money in a low-cost way without having to spend time studying companies or staring at financial numbers.

If you’re a little more adventurous and like higher returns. You can check out our factor-based investing strategy.