Unit Trust : How do you select one?

As I have explained in my earlier posting, buying unit trusts is no different from buying stocks. To start off, you may want to take the top-down approach.

1) First, look at the global economy. If the economic indicators are not doing so well at the global basis, likelihood is that the return of your investment will not be so fantastic.

2) Then, focus at the region or country or industry that you are interested in. For example, if the economy is recovering, the commodity market should start to pick up because the economy will need more resources to satisfy growth.

3) After you have done the above studies and decided what to invest, you will then look at the fund managers that are providing this type of fund. Track records are very important for selecting the right funds. Similar to stocks, buying a newly launched fund is equivalent to buying an IPO stock. It is better to select fund managers who have been in the market for a certain period of time in order to have enough information to assess their performance(my personal preference is at least 5 years).

4) Compare the returns of the funds and the performance of the fund managers. There are a number of websites such as fundsupermart that provides very detail analysis of these funds as well as their performance over time. In addition, you may also want to look at some of the ratio listed below to evaluate the funds.

Expense Ratio
As a rule of thumb, you should look for funds with low expense ratio. This is the cost of managing the fund. Given equal performance, the fund with the higher expense ratio will give a lower return compared to one with lower expense ratio.

Sharpe Ratio
It is the excess risk adjusted return. Given two funds with the same investment strategy, the one with the higher sharpe ratio will give you more return over time.

The above is just one of the many ways to select a fund. After selecting a fund, you should also have a strategy to buy into the fund. This will be discussed in future posting.


Disclaimer: The content in this blog contains purely my personal opinion and it is in no way a substitute for professional financial advice. You should seek advice from a professional financial advisor with any question regarding your financial matters.