Investing On Your Own May Be Much Better

I recently met up with a lady who worked in a Fund House and asked her to understand the inside world of fund managing.

For most people in Singapore, their main investment tool is probably Unit Trust through an Investment Link Policy. This is a policy you purchase where you get insurance coverage as well as potential wealth building.

So I asked her what are the benefits of buying Unit Trusts instead of investing on our own. Through our discussions, I gathered 2 main benefits:

 

One of the benefits is that investing in Unit Trusts gives you access to vehicle instruments which requires huge amount of money. For example, to buy into some high rated bonds may costs $50,000 per unit. So for most investors, the capital requirement may be too high. By purchasing a unit trust, investors pool their money together into the trust and with higher amount of capital, the trust can purchase these investment vehicles that requires huge capital and apportion units to individual investors.

 

The 2nd benefit if we are talking about an Investment Link Policy, is that it forces the investor to save every month. This form of forced savings is definitely better as compared to another individual who does not have a savings plan. At the end of 30 years, the individual can expect to get back a sum of money.

 

But is Investment Link Policy (ILP) the best tool? Should an individual invests on his/ her own as compared to investing through an ILP?

Here are some things to take note about investing in Unit Trusts

 

There is usually an upfront fee.

Whenever you invest into buying unit trusts, you will be charged, typically about 5%. So for every $1000 you pay to buy Unit Trusts, only $950 is invested. The $50 is taken as an upfront fee.

There is usually an annual management fee of 1% to 2%.

There are costs in managing the unit trusts. Whenever the fund manager decides to do switching in fund, the fund will incur costs. This will be then pass on to the investor in an annual fee of typically 1% to 2%.

Think about this carefully. For the 1st year, you already incur a costs of 5% upfront fee and a 2% annual fee. For you to break even, your fund needs to make more than 7%. This is just to break even.

That is why investing in Unit Trust is definitely for the very long run of say 20 to 30 years. And even then, unless your fund manager is that excellent, it is unlikely you can get returns that are more than 8%. This is because of all the costs involved.

But if you are really not at all interested in investing or really have no time, buying into ILP will be a feasible method. But if you are interested in getting a 10% returns with minimum effort, you will have to stay tun to my next post where I will talk about investing in ETF.

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To your dreams,

Mind Kinesis Research Team

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