Investing in Unit Trusts

Besides insurance plans for my son, I am thinking of buying some unit trusts for him. He has a great advantage over me in growing his investment and that is time!

Unit trusts is suitable for him because of his longer investment time frame and also because of dollar cost averaging.

A unit trust is a type of investment vehicle that 'pools' your money with other investors'; the collective amount is then invested to buy a range of shares or other instruments.

Unit trust offers a few advantages:

1) Diversification
Unit trusts offer an affordable and convenient way to diversify an investment. With as little as $1,000 for most funds, investors are able to hold a diversified portfolio of stocks of companies (or other instruments) that may otherwise be out of their reach.

2) Professional management of funds
When investing in unit trusts, investors are also leveraging the expertise of fund managers who are full time professionals. Fund managers will sometimes have analysis or research that an ordinary investor would not have access to and this could enable the fund manager to make better investment decisions.

3) Access to foreign markets
Unit trusts represent a convenient and effective way to invest in foreign markets. Quite often these would be out of reach of most individuals.

4) Liquidity
Unit trusts are highly liquid and investors can convert their unit to cash anytime, as fund managers are obliged to buy back the units from the investor. Moreover, there are no restrictions on how long an investment has to be held before units can be sold. Investors can easily buy extra units or sell down their holdings piecemeal. They don't have to depend on other buyers in order to sell their units either, because units are created or cancelled depending on demand.

5) Economies of scale
Investors with relatively small amounts to invest may still enjoy economies of scale: each investor can gain access to a much wider number of stocks, or markets than if he had tried to buy them individually. For example, to buy all the shares in a typical unit trust portfolio would be very expensive since dealing in small lots in individual shares is pricey.

6) Ease of use
Unit trusts are convenient and their fund prices are quoted daily in the newspapers and on web sites. They can be invested with cash, CPF and SRS.

7) Regular savings
After making the initial investment, investors can do a RSP (Regular savings plan). Can be as low as $100 per month. RSP is good for accumulating wealth in the long term due to dollar cost averaging.

However there are also drawbacks with unit trusts. Will be discussing that in future.