Sunday, October 6, 2013

Is investing in unit trust a good idea?

Many people say they invest their money. When i ask most of them, they would say they have investments in bank products, unit trust or investment linked policies. When i probe further and ask why did they invest in it, they would say because my financial advisor recommended it to me. Or they would say that guy in the bank asked me to buy it saying the returns are higher.

What is a common sales pitch from insurance agents?

You would be familiar with this phrase:

"Why put your money in the bank when you can earn a higher return if you invest in this product?"

Sounds familiar? I've heard it countless of times.

There is nothing wrong with this sales pitch. The problem is that most people do not have enough knowledge of a product before putting their money in it. They choose to trust the professional advise from the advisers. Many people bought into Lehman brothers mini bonds and investment advisers told everyone that bonds are safe so you don't have to worry. But not many people know the mini bonds are derivatives of sub prime mortgages which is of very high risk. Not all bonds are safe. Especially corporate bonds issued by investment banks or companies have default risks. This means that once they get into trouble, most likely you will not be able to get your money back.

This is where the problem lies. I've heard my friends cancel their insurance policies because they could not afford it any longer. They committed too much of their money to paying for insurance policies. This would not have happened if they know how much of their income they should allocate for insurance? I would say 10% of your income is a fair value.

Do you buy unit trust or funds from your advisers? How many of them have profits and how many have losses? If you buy from advisers, the sales charges are generally high at 2-3%. This is an important point to take note as you are already -3% in your fund at the point you bought it. If yours is a balanced fund that has an estimated annual return of 2-3%, then at the end of that year you would have only broke even. Balanced fund consist of bonds and stocks. You are investing in both products at the same time.

The question is do you know what is a bond and what are stocks? How do they work? What causes a bond price to go up or down? These are the questions that you should ask your adviser. If he/she can't give you a satisfactory answer, then don't invest in it.

Personally, i do not invest in unit trust. Most unit trust funds do not outperform the market. When we say outperform the market, we mean the stock market index. Therefore, we should at least benchmark our investment returns against the performance of the Straits Times Index(STI) if you're in Singapore. The STI has an annualised return of about 9% for the past 10 years. If your investment has not generated this kind of return, you're better off just investing in the index itself. Read Investing Basics - Low Cost Index Fund investing (Passive Investing) to know more about Philips securities share builder plan to invest in STI ETF and check out POSB invest saver. Both offer you the chance to invest in the index.

When investing, only invest in something you know. If you are clueless about it, then seek advise and find out more. Do not commit into anything unless after careful considerations. Some products have lock in periods and will have penalty if you terminate it early. Having the knowledge will save you from unnecessary problems in the future.

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