Disadvantages of Unit Trust

As with any investments, unit trust involves risk. In this article, we look at some of the disadvantages of unit trust. I am providing you this information not to discourage you from investing, but rather, so that you approach it with a clear understanding of what investing in unit trusts involve.

If you are considering investing in unit trust, make sure you get a reliable unit trust consultant. Preferably, you should get a consultant who can explain to you the risks involved. The unit trust scheme promotional material is also useful in giving you an idea of the differences in investment risks between different unit trust schemes. Generally, the disadvantages of unit trust can be listed as follows.

Loss of Control
When you invest in unit trust, you are not directly involved in deciding how your money is invested. As long as the unit trust fund managers invest your money in accordance to the prospectus and deed of the unit trust scheme, there is little that you, the unit holder, can do if you happen to disagree with their investment decisions. Having said that, it must be remembered that unit trust fund managers are professionals with a reservoir of investment knowledge. They are more likely to make the right investment decision than rash small investors. However, if you feel that you are better off making investment decisions yourself, then unit trust may not be the right investment instrument for you.

Fees and Charges
The services provided by the unit trust fund managers are not free. There are fees and charges payable by the unitholders to the unit trust schemes. Granted these fees are almost negligible compared to the professional expertise received by the investors, it is something the unitholders have to bear.

Opportunity Cost
Opportunity cost means that by putting your money in unit trust, you lost the opportunity to use it elsewhere. Of course, there is no guarantee that putting the money elsewhere will yield better returns. In the same way, putting the money in unit trust prevents you from investing it elsewhere, such as, directly in the stock market. There is two way to look at it. If the unit trust performs better than other investment instruments, then you did the right thing. On the other hand, if the unit trust performed disappointingly, then you might have argued that you could have done better investing it elsewhere. One thing that investors should remember is that unit trusts carry much lesser risk than direct investments. A single direct investment may produce significantly better results than the investment in unit trust; on the other hand, it may also perform significantly worse.

People who invest directly are those who are willing to take the risk, have the time and willingness to learn how to invest directly, and are very much into the stock market for the thrill. They are quite likely gamblers than investors, and are looking for short term gains. People who invest in unit trust, however, are looking for gain of the long term, of at least 5 years or more. They know that in the short term, direct investments in stock market may produce even better returns (or significantly worse performance) based on their exposure. They are comfortable to invest for the long term. The money they invest in unit trust is parked there for 5 years or more, in which time, the overall return is better than the other investment instruments.

The information provided in this article is related to unit trust, also called mutual fund, in Malaysia.

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