Disadvantages of Unit Trust Scheme - How to mitigate them

I always believe that it is fair to my clients that they understand the disadvantages of unit trust scheme before making their decision in investing in it. It may sound idiotic not to downplay the bad sides of it, but I'm confident that after I walk thru with them on how to mitigate such disadvantages, they will indeed see some of them as advantages..:)

1) Fluctuation in total return of investment

For equity UTS, the movement of share prices in the stock market is reflected in the NAV of the UTS. As these vary, so prices of units in the UTS can go down as well as up.

Mitigation:

While it makes sense to leave the investment grow while market is up, it is crucial to practice switching and DCA when market is going downhill.

It is recommended to switch existing equity funds to bond to prevent depreciation of investment when stock market is bearish. Bonds tend to perform better when stock market is down and it is one of the lower risk type of fund in UTS.

As for new investment, DCA is the best way to accumulate units when fund prices are falling; hold them till market rebounded, one can sure make a handsome return.


2) Loss of control

Investors in UTS lose the right to direct how their savings are invested to fund managers. If UTMC fund managers invest UTS investment portfolios in accordance with the prospectus and deed, there is little that the unit holders can do if they disagree with the investment decisions made by the fund manager.

Mitigation:

Is that really an disadvantage of having professionals managing your money? How often have you or people around you made money by investing directly into stock market? Rarely I guess.

3) Fees and charges

The services provided by UTMC are not without cost. Hence there are fees and charges payable by investors in UTS. The 2 main charges are Initial Service Charge and Annual Maintenance Fee.

Mitigation:

While Annual Maintenance Fee is charged annually, Initial Service Charge would only be charged once when UTC investment is made. Since it is always recommended to stay at least 3-5 years in UTC investment, the cost would be very likely absorbed by the total return of the investment.

Try to avoid redeeming the investment if not necessary as re-investment will incur another round of Initial Service Charge; should you want to safeguard your investment when market is down or realize the profit, you may just park it into bond funds.

4) Opportunity cost

As with any decision, an investor who invests in UTS may have produced better returns by investing directly in the markets. This excess represents the 'opportunity cost' of investing in UTS.

Mitigation:

Refer to item (2).