Intro to Investing: Unit Trusts (Mutual Funds)

Now that you have a better understanding of stocks let's talk about Mutual Funds or Unit Trusts as we call them here in Singapore.

This investment vehicle consists of a pool of money collected from many investors, managed by a fund manager to invest in securities comprising stocks, bonds, or a mixture of both, depending on the fund's objective.

Explanation: One of the biggest challenges about stock investing is thousands of companies review and analyse.

Finding the right company to invest in can quickly become a tedious and laborious activity for the average investor. Not to mention, the average investor has a smaller budget as compared to a fund house.

A mutual fund seeks to solve some of these challenges by pooling the resources of different investors (including entities) to invest in a category of security.

Let's use the smartphone example again.

If we were to invest in just the iPhone, we would only have one brand (Apple) as our asset. However, by pooling our resources together with a few more investors, we can add Samsung, Sony, Nokia, Huawei, Xiaomi, and many other brands into our Smartphone investment basket.

This reduces our risk level because should one of these companies collapse, we would still have different companies in our Smartphone basket to diversify that risk.

In the Unit Trust example, a fund manager monitors the different companies within the basket to pick out those with good investing potential. In return, a percentage of the funds, or asset under management (AUM), is paid out as a management fee.

Things to Note: The critical part of Unit Trust investing is to select industries or categories with expected growth potential.

Another key strategy is to leverage on Dollar-Cost Averaging as a long-term investing strategy.

Risks Consideration: Like stocks, there is always the possibility that an entire sector might collapse, affecting the fund's rating.

However, in most cases, the risk level is typically lower as you're diversifying risk by investing in different stocks rather than relying on just one (or a few) companies. Most importantly, Unit Trust is a long-term investing strategy that works best with a regular investing schedule.