You must have guessed it! Nothing is perfectly blissful, without anything to worry about. Almost everything in life has a downside, a catch or some dark spot somewhere. Well, unit trusts are not the exception. In any case, when you are looking at investing, which by nature has to deal with the future, you can't rule out a few concerns. So, what's the catch with unit trusts? Is there something that should deter you from jumping right into unit trusts as a flexible investment vehicle?
Not really, but you should be aware of the following factors:
Charges May be Excessive
Even when you buy stocks on your own, transaction charges are incurred. There is a possibility, however, that a fund manager may have charges that will be significantly excessive, perhaps in the name of providing professional management. So, check out the charges before you invest, to ensure they are reasonable. Otherwise, you may consider another fund.
Running Costs
The administrative costs of the fund manager can also be a source of worry. The earnings from the portfolio he is managing can be substantially eroded by out-of-tune running costs if the manager engages in unbridled spending. By absorbing those costs, the fund will end up with significantly reduced profitability, which undermines the investment of unit holders. By examining past performance results of a fund and possibly comparing with the performance ratios of other funds or a benchmark, it will be possible to see how efficient the manager is with resource utilisation.
Under-perfomance
The expectation in going for a professionally managed fund is that the benefit of expertise will reflect in the earnings of the fund. No guarantees can be given on this, however. When you turn your fate over to a unit trust, you lose control. While this is expected to pay, the reverse could be the case. Even the fund manager can commit errors that you possibly would have avoided, investing personally. The manager could, for instance, buy high risk stocks or bonds (which you probably wouldn't) and if the market moves against him, the resulting loss affects you, which wouldn't have been the case. So, in some cases, the overall performance of the fund could be less than some investing unit holders could achieve on their own.
Timeframe Handicap
Unit trusts are generally a fairly medium to long-term investment. Early redemption may have additional cost implications. This may not prove totally convenient to all investors.
In all, the challenges you may have with unit trusts do not, we believe, vitiate the significant benefits that they offer to investors, especially the small or largely uninformed ones, who can key into it as an avenue for serious investing. As with every human undertaking, there are riska to contend with, but the potential gains cannot be written off. Go for a fund(s) with a solid, credible trustee as well as a proven fund manager. Their track record is always there to show if they should be trusted to manage your investment.
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