Secrets of savvy investors: How to Read a Unit Trust Fund Prospectus (Part 2)

Secrets of Savvy Investors:
How to Read a Unit Trust Fund Prospectus (Part 2)

In the previous article ‘Secrets of Savvy Investors: How to Read a Unit Trust Fund Prospectus’ (Part 1), we discussed what a prospectus was, why we should read it, where to obtain one and how to read the prospectus. Now, we shall take a look at salient points in the prospectus, particularly on risk factors, investor profile, financial performance, and possible fees and charges.

• Risk factors
Pay attention to the risk factors stated and compare them to your own risk appetite or tolerance level. Some of the factors that may determine your risk appetite include how long you are willing to wait before you need to use your investment, whether you are willing to or can afford to tolerate fluctuating values in the long-term, your investing experience in the past (if applicable) and your own expectations from the unit trust fund. The risk factors faced by unit trust funds are typically market risk, interest rate risk, liquidity risk and credit risk. As an example, a fund holding investments in foreign emerging markets will be subjected to the economic and political conditions there. In addition, any changes in the foreign currency exchange rate will affect the return of that fund.

• Investor profile
Most prospectuses include an investor profile as guidance for potential investors. It tells you the characteristics of investors who will potentially invest in the fund. However, this is subject to your own unique circumstances that you will need to observe.

• Financial performance
This serves as a good indicator of how the fund is managed, especially if the fund has been in existence for a long period. If the fund has managed to survive through adverse conditions, you will naturally have more confidence in its future performance. You can also use this to compare a particular fund’s performance with that of other similar funds and its performance benchmark.

• Possible fees and charges
As all unit trust funds are professionally managed, various expenses and charges will be incurred, compared to an outright purchase of a security. As an investor, some of the relevant fees and charges you may encounter include:

Sales charges

Take note of the sales charges or charges payable to the fund manager. These charges are known as front end and back end loads, with different funds having different loads. The loads for a unit trust fund can be payable as:

• A front-end load, which is a commission or sales charge applied during the initial purchase of the units of a unit trust fund; or
• A back-end load, which is a sales charge or load to be paid when selling the units of a unit trust fund.

Repurchase/Redemption fee

An investor may be charged an exit fee upon repurchase/redemption of his investment. For instance, an exit fee is charged for redemption of investment in a bond fund before its maturity.

Switching fee

Should you want to “switch” (transfer) your investment e.g. switching from an equity trust fund to a money market trust fund, you may be charged a switching fee. Most unit trust funds offer the flexibility of partial and full switches, as long as you pay the switching fee. Usually, the fund will also set a minimum investment balance before granting your request to switch. This is to prevent unit trust holders from frequently switching their investments.

Management fees

This is paid out of the fund's assets and covers operating expenses of the fund’s managers and advisors.

Other fees directly related to the funds

Some of the more common fees directly related to the unit trust fund include custodian/trustee fees (paid to the custodian or trustee) for safekeeping of the funds’ assets, legal fees, accounting fees, auditors’ fees and taxes.

A unit trust fund prospectus will indicate all the fees you need to pay, so ensure you read it carefully. Always be aware of exactly what is being charged to the investor and what is being charged to the fund. You will then be able to make a meaningful comparison among the cost structure of different unit trust funds before making your investment decision.

Conclusion

Even the savviest investors sometimes tend to take a prospectus for granted and just casually flick through it instead of properly reading it. Closer scrutiny of the prospectus will reveal important need-to-know information such as the fund’s investment objectives, risk profile, restrictions, investment strategy and much more. Spending some of your precious time going through them is definitely worthwhile! It will help to prevent you from making investment decisions that will be regretted later. Confucius once said, “Good people strengthen themselves ceaselessly” and SIDC believes that good investors strengthen themselves with the constant pursuit of knowledge, starting with the prospectus.