May 12, 2021

What is unit trust in Singapore and how do they work?

By Cathy

Unit trusts and exchange-traded funds (ETFs) have become increasingly popular among investors in recent years as a simple and cost-effective way to invest. Most unit trusts in Singapore enable regular unit buying and selling.

The Singapore government has been providing incentives to fund managers to encourage them to set up asset management firms in the country, and the number of Singapore domiciled funds is steadily growing. Domestic retail funds are mainly formed as unit trusts in Singapore and are governed by the Monetary Authority of Singapore (MAS). Unit trust in Singapore benefits from several tax breaks, with some incomes being excluded or taxed at a reduced rate.

What is a unit trust?

A unit trust, also known as a mutual fund that pools capital from several investors to purchase stocks, shares, and other securities. Typically, managed by asset management firms such as Blackrock or Fidelity, which sell a variety of fund products with various objectives (e.g., Emerging Markets Fund, Value Fund, Growth Fund, etc.) from which investors can select.

Investors can typically only invest in a fund through the management firm, but some brokerages can purchase shares in these funds on behalf of their clients. You cannot, however, exchange these shares with other market participants.

A Unit Trust’s Cost

The gross net asset value (NAV) of the fund is determined at the end of each trading day by adding the value of all assets minus the fund’s liabilities. Let’s say Company A operates a unit trust that has invested $200 million in a range of stocks and bonds on behalf of its owners.

Company A’s assets will include this $200 million investment. Let’s say Company A owes $20 million in salaries and rent to its workers. This will be categorized as a company’s liability. Once 9 million shares have been sold, the unit price of the trust share is 20 USD: Net asset share value = (200 million dollars in assets – 20 million dollars in liabilities) x 9 million-unit trust share = 20 dollars per share.

Unit trust fees

Financial management companies are trying to create portfolios that will outperform the market in the long run. In return for the extra income they provide, unit trusts charge investors who buy shares in their funds. These payments cover everything from the salaries of investment analysts to the leasing of their offices.

However, the vast majority of these funds have historically underperformed the market and are unable to justify the fees they charge. Although mutual fund fees of 1% to 2.5 percent are still low as compared to hedge fund fees of 2/20 (2 percent fee on initial investment and 20% fee on gains made), many have argued that unit trusts do not deduct expenses. While mutual fund fees of 1% to 2.5 percent are still low as compared to hedge fund fees of 2/20 (2 percent fee on initial investment and 20% fee on gains), many people have argued that unit trusts do not deserve such a high fee given their poor performance over time. As a result, it’s usually a good idea to keep fees to a minimum because they can eat into your returns and reduce your money’s ability to accumulate over time.