How to Invest in Mutual Funds (Unit Trusts) in Singapore

How to Invest in Mutual Funds (Unit Trusts) in Singapore

While the world refers to this financial instrument as a mutual fund, Singapore calls it a unit trust (maybe because it sounds more trustworthy and less risky?). For the purposes of this guide, I will refer to it as a mutual fund because if you were to do your own online research, you will want to use the keyword “mutual fund” and not “unit trust”.


What is a Mutual Fund/ Unit Trust?

A mutual fund would be considered a more complex financial instrument compared to cash, stocks and bonds. A mutual fund is basically a packaged product of different financial assets.

A mutual fund is a single portfolio of different financial assets (stocks, bonds, commodities, cash or a combination of different assets) and is actively managed by an investment company (or a fund manager) on behalf of many investors.

When you invest in a mutual fund, you become a part owner of a large investment portfolio, along with all the other shareholders of the fund. When you purchase shares, the fund manager invests your funds, along with the money contributed by the other shareholders.

There many different investment companies around the world who set up different mutual funds. In fact, there are thousands of mutual funds making it potentially difficult for a new investor to choose from.

Each mutual fund is designed by the fund manager(s) with the intention to create a strong portfolio that will reap good returns for its investors. A fund can be designed to capitalize on any asset class, markets, company size, sector, geographical region or a combination of different benchmarks. Basically, if investment companies can find a reason to create a new fund, they will.

How to Invest in Mutual Funds/ Unit Trusts in Singapore?

A lot of Singaporeans get started investing through mutual funds because it is fairly easy. There is no need for a trading account or CDP account and there are several ways to invest in a mutual fund.

You can open up an account with a fund company or distributor such as Fundsupermart that even has in-house advisers on hand to assist in the selection of your mutual funds. Poems (PhilipCapital’s online trading platform) allows you to trade mutual funds at no platform costs. Funds are also sold through brokers, banks, financial planners, or insurance agents.

The fund companies provide consolidated recording that includes all purchases made through the supermarket, even if they are from different fund families (investment companies).

The benefits of investing in a mutual fund are that your risk is spread out over a portfolio of financial assets and the investment decisions are actively made by a professional (assumingly). That means you do not have to worry above individual stock picks or go through the procedure of buying and monitoring different securities. However, you do need to pick the “right” fund. “Right” means a fund that will make you money.

The major downside of investing in an actively managed mutual fund is its highly yearly management fees and “front-load” sales charges which average 5%. That means upon investing, you are already down 6% of your invested money. So if the fund is up 7% (considered an average expected return) for that year, you technically have only a 1% return on investment. You might as well put the money in a fixed deposit account. It is guaranteed and gives you a better return.

Another point against mutual funds is that there is no guarantee that the fund manager will get high returns on the investments. In fact, several studies have shown that a majority of fund managers do not even beat the market average. That simply means that the fund managers are getting paid big money but are not delivering on exceptional returns.

In addition, if you invest in the fund through a fund marketplace company, bank, financial planner or insurance agent, you will pay varying percentages of commission/ fees on top of the management fees from the fund itself.

Read more about mutual funds/ unit trusts here.

Index Mutual Funds

There is a category of mutual funds called index mutual funds or more commonly just referred to as “index funds”. This is yet another financial instrument with its own complexities.

Index funds are a type of mutual fund that has a portfolio constructed to match or track the components of a stock market index. Ok, you are probably wondering what a stock market index is.

“A stock index or market index is a measurement of the value of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.”

~ Wikipedia.

Basically, a market index is a representative sample of the stock market and tracks the overall relative performance of the stock market. Well-known market indexes include the Dow Jones Industrial Average (DJIA), Standard & Poor’s 500 (S & P 500), Hong Kong Hang Seng Index, Nikkei 225 and Straits Times Index (STI).

An index itself is a mathematical construct, so it may not be invested in directly. But a mutual fund or ETF (see next section) can be designed to track an index. That means, in the most fundamental way, the index fund’s portfolio consists of exactly the same securities in the index, in the same proportions as the index. So, in a sense, the index fund is a “replica” of the index or “tracks” the index.

The first index fund was launched in 1976 the first index fund was launched by the investment firm Vanguard Group founded by John C. Bogle. Called the Vanguard 500 (VFINX), it tracked the Standard & Poor’s 500 (S & P 500), an index that tracked the largest companies having common stock listed in the New York Stock Exchange (NYSE) or NASDAQ.

Since then, index funds have become very popular and have historically out-performed the majority of the actively managed mutual funds. Index funds give broad market exposure, have low operating expenses and low portfolio turnover.

Index funds should also form the backbone and majority of a passive investor’s portfolio.

This sounds awesome right?

Unfortunately, in Singapore, there are no low cost index funds available to us on local platforms at the moment. There are only feeder funds like the Infinity Fund from Lion Global. However, this feeder fund “feeds off” the master fund which means we end up paying twice the amount of management fees which defeats the attractiveness and value of a low cost index fund.


Bottom Line: Until we get low-cost index funds available to us at real low costs, you need to hunt for funds that have a lower management cost and find a distributor that does not charge a platform fee or charges a low platform fee.

For a passive investor looking to protect and grow your wealth over the long run, avoid investing in traditional high-cost mutual funds.

The good news is that there is a low cost alternative type of fund available to investors. This fund is called an Exchange Traded Fund (ETF).


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