Unit Trusts

In my early investment days, I have invested in a few counters of unit trust.  I was a newbie then and naively listened to advices given by those bank relationship managers.

Those advices included:
1. Stocks are volatile and not safe
2. You do not have experience or time to actively manage your stock portfolio.
3. Unit trusts are not so volatile and safe, as they invested into high yield bonds and blue chip stocks.
4. Experienced fund managers actively manage the unit trust portfolio.

Those days I thought it was a good deal.  The fixed deposit interest is so low that it cannot beat the inflation rate, and so basically the money is just rotting away inside the FD.

Moreover, I needed to travel frequently then and so have limited time to monitor the stock market.

I have invested into 3 funds, Asia Ex Japan (70%), Pan-European (15%) and a technology fund (15%).  I can't remember those fund names now after more than 10 years has passed.

However, later I discovered it is not really the case for unit trusts as per those advices from bank relationship managers.

Firstly, there is a substantial sales fees.  The investor needs to pay 2-5% sales charge upfront on initial purchase.  Meaning for a capital sum of $10K, you could lose up to $500 even before you make a single cent.

Secondly, there is an annual management fees, typically about 1-2%, which the fund manager get it directly from the unit trust (dividends received from bonds and blue chips).  Irrespective of the unit trust's performance, we need to pay the management fees.  So, in this way, the Passive Income portions from the unit trust investments go to the fund managers.  The unit trust investors just get the capital gains, provided that the unit trust appreciate in unit cost.  Therefore, the investors take all the risks for capital gain, while the fund managers get steady incomes.

Thirdly, unit trusts are not safe harbour at bad times.  They also fell like stones to the bottom of the seas during SARS.  One of my unit trusts fell from $10+ per unit to just $1+ per unit.  I think the most likely cause was a lot of panic selling from investors redeeming that unit trust, and the fund manager has no choice but to sell off the stocks in the unit trust's portfolio even though those stocks were at rock bottom values.  Therefore, a unit trust investor who does not panic and does not want to sell during those crises could only watch helplessly the panic selling off by fellow investors, which drags the unit trust value lower and lower.  And worst, the fund managers do not have fund for opportunity investment into those rock bottom blue chips. 

Fourthly, after the crisis is over and the fund managers receive fresh funds as investors return.  However, the stock market has already rebound and they already missed the boat as the best investment chance is long gone.  Therefore, the upward recovery of unit trusts is slow and always lagged behind recovery of the stock market.

My Asia Ex Japan fund recovered fastest and I sold off all my unit trusts at break even point.

Lesson learnt from this experience:
1. We have to take charge of our own investment.  Nobody care more about your investment than you youself.
2. Unit trusts do not qualified as a viable passive income source for me.