Know Sales Charge and Expense Ratio before committing to buying Unit Trust

When you buy a unit trust, you will need to pay upfront sales charge to the distributor of the unit trust. This can vary across various unit trusts. It can be as low as 1% to the industry average of 5% on the initial value of investment. An investment of $1,000 results in you getting only $950 being invested in the fund. $50 goes to the distributor of the fund.

 

From 1 July 2007, CPF Board has set a cap on the sales charge to 3% for all CPF-approved unit trusts. This will result in savings for CPF members buying into CPF-approved unit trusts. If you wanted to invest your own money in unit trusts (non CPF-approved), you are advised to ask how much the sales charge is. You then make a decision whether it is something you can accept.

 

The next major consideration is the expense ratio tied to the unit trust. The expense ratio is the management fee you pay to the investment manager of the fund. The investment manager makes investment decision on the fund to grow the fund value. Again expense ratios vary for different unit trusts. This expense eats into the returns of the fund and hence it is wise that you ask for the expense ratio which is denominated as a percentage of the fund value.

 

From 1 Jan 2008, CPF Board has set benchmarks (caps) on expense ratios for different categories of CPF-approved unit trusts. This way, CPF Board protects the investment value from being eroded by high expense ratios for the CPF members.

 

Risk category                     New Expense Ratio criterion (%)

 

Higher risk

(e.g. equity funds)                                               1.95%

 

Medium to high risk

(e.g. equity/bond funds)                                     1.75%

 

Low to medium risk

(e.g. fixed income products or bond products) 1.15%

Lower risk

(e.g. money market product funds)                   0.65%

 

When you are considering the non CPF-approved unit trusts, use the above as a guide in making your decision to invest into the funds. 

1/3/2007 8:10 AM

 

Copyright © 2007, the author known as LKT in Singapore.

 

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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