Asked on 24 Oct 2018
Hello guys! What do you think of unit trust as investment? I've also been told by wary relatives to never do ILP (investment and insurance should be kept as two separate things). Let's keep it a beginner level discussion, coz most articles I find online are super long-winded.
If you want a beginner level analysis - an ILP is just the wrapper held by an insurance company for unit trusts. ILP wrappers vary in all sorts of manners, but the most commonly observed one is where the majority of premiums will be allocated towards insurance in the first few years before being used for investments.
Most updated ILPs today have much better structures than in the past, where they give you far more additional units instead of front loading the costs.
Some of the explanation already done by Kenneth is accurate, such as the examples, fees and intentions. A unit trust as an investment is thus considered expensive and can only be considered under two conditions:
1) Beating the market, like Kenneth said
2) A better return-risk ratio, where volatility is much lower against its benchmark. Par funds would be an example of this, where you trade lower returns for a much more definitive chance of selling high.
The second condition continues to be a lot more prominent in todays mutual funds due to the increasing efficiency and globalization of the markets today. Of course, there are specific sectoral funds and inefficient market funds that easily smash market indices, but they require a long time horizon to wear out the volatility.
As a Financial Advisor I've reserved funds that have records of beating famous benchmarks like the STI, SNP500 and recently the QQQ index.
Additionally, I've done math on my end to show how some ILPs easily beat a pure vanilla Unit trust return over time (as well as standard ETFs such as the STI ETF, SNP500).
Hey! Let me explain to you to the best of my ability: Before that, I will define what Unit Trusts are. For more info you can read here: https://blog.seedly.sg/diy-vs-active-unit-trust-vs-passive-funds-etf/
What are Unit Trusts:
These are an actively managed investment funds which are not traded on a stock market. It’s usually higher cost due to the nature of the way that a fund is managed… In this case, as seen above, like a team of analysts running behind the scenes looking to try and beat the market.
Potential to outperform the market
Easy to switch, buy and sell on online platforms
FundSuperMart (FSM), DollarDex, Philips Securities POEMS
1.5% – 4% Management Fee paid to the fund managers regardless of performance
Performance strongly depends on advisors and fund manager
Can be complicated to understand fund fact info sheets
Examples include:__ First State Dividend Advantage Fund, East Spring Fund Franklin Templeton Bond Fund
Set up a FundSuperMart (FSM), POEMS, or DollarDex account
Note: POEMS has $0 platform fees compared to FSM’s (0.05%) but the platform interface is slightly older looking
What are ILPs:
This is one of the many ways to buy a Unit Trust. So basically if you see above, I have shared the DIY approach to buying a Unit Trust via one of the platforms described (FSM, POEMS etc). However, with ILP (Investment Linked Policies) they are more like Insurance first with investment components inside as well.
ILPs have a wide range of funds (unit trusts) for the policyholder to choose from. Some of these funds require a high initial capital to invest.
However, this is the main con - Allocation rate: The full amount of your premium will not be used to buy into investment units for your early years. This method of front-end loading ensures that distribution and administration cost is incurred on the policyholder during the early years of his policy. Read more about what ILPs are and why you should consider strongly before committing to a ILP in Singapore: https://blog.seedly.sg/investment-linked-policy-ilp-singaporeans/
An ILP is a wrapper for unit trust. So it's underlying asset is a sub fund of Unit Trusts.
However there are different ILPs. There are ILPs with a sum assured and without.
And those with Sum Assured could be front or back end load.
Some come with portfolios also curated by an external investment company, some you have to choose yourself or get your agent to present you with one.
It's hard to be beginner friendly because they product isn't.
But if you're trying to find a road to self insurance or protect the difference between your end financial goal and your journey saving there, then an ILP is an option that could be cost effective.
Not many people truly understand how it works, so if you want a good explanation, find someone who you trust to be objective with your options.
One word: avoid. No guarantee that the unit trust price will go up and continue to go up. And fees are payable even in years of negative returns. ILPs are basically insurance contracts structured around unit trusts, only with more fees involved on top of the management fees. Would rather manage my own portfolio where I can make money in any market condition