Which Unit Trusts to Invest in?

There are literally hundreds of unit trusts managed by different fund managers that are available for investors. So how do you decide which one to invest in?

If you are conservative like I am, you may want to go for unit trusts that have lower risk, less volatility and had a good historical record of performance or returns on investments. It is true that past performance of a fund is not indicative of same future performance. However, performance over a period of 3 years is one criterion for deciding on whether to invest in that fund, because 3 years is long enough to average out any short-term exceptional gains or losses.

To help CPF members make informed decisions on investing in unit trusts under the CPF Investment Scheme (CPFIS), Standard & Poor’s Fund Services Asia (S&P) has been appointed by the Funds Performance Tracking Committee (FPTC) to monitor the performance of all unit trusts and investment-linked insurance products (ILP) included under the CPFIS.

Refer to CPF website: http://mycpf.cpf.gov.sg/ and Investment Management Association of Singapore (IMAS) website: http://www.imas.org.sg/ for more information.

Whether you are investing your CPF money or your own cash, why not review the Quarterly Performance and Risk Monitoring Report prepared by S&P.

S&P developed its S&P Fund Stars over a decade ago with two objectives in mind: to establish a global performance measurement methodology and to assist investors in evaluating the return and risk management performance of investment funds. A fund’s monthly performance relative to its sector average (i.e. peer average) is calculated for each of the 36 months over the three years to date. The average and volatility of these 36 numbers are then converted into a S&P Fund Stars ranking as follows:

*****  Top 10% of the sector

****   Top 11-30% of the sector

***     Top 31-50% of the sector

**       Next 25% of the sector

*         Bottom 25% of the sector

(Source: Standard & Poor’s Fund Services, Asia)

Besides the S&P Fund Stars rating, CPF Board has also provided the Risk Classification of unit trusts under the CPFIS. The Risk Classification System, review two components – Equity Risk and Focus Risk. The actual risk classification of the unit trusts can be found at the CPF website.

The unit trust with a greater proportion of its assets invested in the more volatile stock market will have a higher equity risk. Conversely, the greater the proportion of the fund’s assets that are in bonds and cash, the lower its equity risk. Based on their level of equity risk, CPFIS-included unit trusts and ILPs will be assigned one of the following risk categories:

• Lower Risk

• Low to Medium Risk

• Medium to High Risk

• Higher Risk

If you are risk averse, naturally you should invest in unit trusts with Lower to Medium risk products.

This is one way to assess the unit trusts that you are interested. However, for a newly launched unit trust without a track record yet, then you are left on your own to decide whether to invest in it. Few considerations to look at:

1. Who is the fund manager and its reputation?

2. The industry sector of the fund?

3. The country focus of the fund? Is this a single country or regional or global fund?

4. Is the fund more equity or fixed income based (e.g. bonds)?

5. What is their investment objective and strategy for the particular fund?

The bottom line in investing in unit trust is really to understand the investment product well before buying it.

Written on 2/27/2007 7:36 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.

This entry was posted in Financial Management. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.