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Unit Trusts


Unit trust costs

There can be a number of costs involved in owning unit trusts, including entry, transferring (switching), ongoing, and exit costs.

The entry fee generally covers the commission for selling the unit trust to the investor, with its associated costs: for example, the cost of the administration which relates to having that investor as part of the fund. These costs vary considerably, depending on the asset invested in, the fund manager and the amount invested. Try negotiating this fee with your adviser. Note, that there is unlikely to be an entry fee on amounts drip-fed into the investment.

the Shape of Money does not charge an entry fee on its recommended unit trust investments.

Most fund managers will let you transfer your money between funds. Check the paperwork, but you should expect to be able to do this freely, unless the fund you're moving to has a higher entry fee than the fund you're transferring from.

There are generally three on-going costs: the annual fee paid to the investment manager to cover investment and administrative activities, a service or trail commission paid to the financial adviser, and an annual fee paid to the trustee. Again, these fees, in particular that going to the investment manager, will vary. This, in part, reflects the different nature of the investments, but also reflects the different charging philosophies of various fund managers. When comparing the returns of different investments, ensure that you compare the various on-going costs.

Examine the true value of those costs. For example, higher costs may be justified in the case of a fund manager who generates consistently higher returns. Remember, also, that nothing is free. When investing in unit trusts, you have someone else looking after your investments. So, quite apart from the expertise you're buying, you are probably also saving yourself a lot of personal time and effort.

Some unit trusts may also charge an exit fee; check the investment statement for details. If an exit fee is charged, it usually relates to redemptions that you might make in the first few years of the investment.

Within the investment statement, there may be a paragraph to the effect that the fund manager has the right to bring in other, as yet unknown, charges and/or change existing charges as they see fit. Be aware that this catchall probably exits.

A useful way to measure the overall cost structure of a fund is with the Management Expense Ratio (MER). The MER is required to be disclosed by members of the Investment Savings and Insurance Association. By excluding "expenses ordinarily incurred by a person who directly invests in assets equivalent to the underlying assets of the Fund" shows the cost over and above what you would pay as a direct investor. It's a method by which you can compare the different cost structures of competing funds.

Returns of unit trusts

The return on your investment is probably the most crucial part of your decision-making criteria.

In assessing the future returns of a fund, the best place to look is at the returns that a fund has already achieved.

But, always remember, that "returns achieved in the past by an investment can only ever be a guide to the future". So the Shape of Money suggests that you

  • Consider funds that have a record of at least five years of returns, if possible,
  • Understand if the returns are after tax and/or expenses, and
  • Review what the ratings companies have to say about a fund and its manager.