I’ve always been cautious about investment options with high fees. Fees are guaranteed, but returns are not. Lowering costs means more capital is put to work for better returns.
Unit trusts have long been considered more expensive than passive index funds and ETFs. But that doesn’t mean they have no place in a modern portfolio. Investing isn’t black and white—there are scenarios where unit trusts provide unique advantages. Here are five situations where they can be a useful tool for investors.
#1 Receive Monthly Interest and Dividends
Many investors seek passive income, especially retirees or those who rely on investments for living expenses. However, most income-generating investments do not pay out monthly:
- REITs typically distribute quarterly.
- Dividend stocks and ETFs often pay dividends only twice or once a year.
This means investors must plan their cash flow carefully, as there may be months where no income is received.
How Unit Trusts Help:
Many unit trusts offer monthly distributions, whether they are equity funds, bond funds, or multi-asset funds. This regular stream of income provides stability and makes it easier to manage expenses without worrying about timing mismatches between payouts.
#2 SGD-Hedged Investments
Investing globally is essential for diversification, and many investors allocate funds to markets such as the U.S., China, Japan, and India. However, investing overseas comes with forex risk—if the foreign currency weakens against SGD, returns can be negatively impacted.
Even when investing in ETFs, this issue persists because most foreign ETFs are denominated in USD, HKD, or other currencies.
How Unit Trusts Help:
Many unit trusts offer SGD-hedged share classes, where fund managers use forex hedging strategies to minimize currency fluctuations.
- This allows investors to hold global investments without worrying about forex risk.
- However, it’s important to note that hedging comes with costs, which may slightly reduce returns over time.
For investors who prefer currency stability, SGD-hedged unit trusts provide a convenient solution.
#3 Estate Tax Considerations
While Singapore has no estate tax, other countries—including the U.S.—do. This is particularly relevant for investors who own U.S. stocks and ETFs.
- Non-U.S. investors are subject to U.S. estate tax if they hold U.S. assets.
- The first US$60,000 is exempt, but anything beyond that could be taxed up to 40% upon death.
- Many investors who have accumulated significant wealth in U.S. stocks or ETFs may be unaware of this risk.
How Unit Trusts Help:
Most unit trusts are domiciled in Ireland or Luxembourg, which means that even if they invest in U.S. assets, investors avoid U.S. estate tax exposure.
For those with large portfolios in U.S. markets, estate planning should not be overlooked, and choosing tax-efficient structures can help protect generational wealth.
#4 Investing CPF & SRS Funds
Beyond cash investments, Singapore investors can also invest using their CPF and SRS funds.
- CPF funds earn decent interest but may still be invested for better growth potential.
- SRS funds, however, only earn negligible bank deposit interest and should be invested to maximize returns.
However, CPF and SRS investment options are restricted:
- Stock and ETF choices are limited—CPF investors can only invest in SGX-listed ETFs and stocks that are on the CPFIS-approved list.
- Only 6 ETFs are available for CPF investing, which limits international diversification.
How Unit Trusts Help:
For CPF and SRS investors, unit trusts provide a much wider range of investment options:
- Over 100 CPF-approved unit trusts, covering global markets and various asset classes.
- Greater flexibility to diversify beyond Singapore-listed ETFs and stocks.
This makes unit trusts a useful tool for CPF and SRS investors looking for better diversification.
#5 Greater Access to Asian Investment Strategies
For investors who want exposure to Asian markets but prefer not to pick individual stocks, ETFs may seem like an easy solution. However, Asia’s ETF market is still underdeveloped compared to the U.S.
- The U.S. alone has over 2,000 ETFs, covering nearly every niche strategy imaginable.
- SGX lists 46 ETFs, though the number of options are increasing, remains far from the scale in developed markets.
How Unit Trusts Help:
For those seeking more specific Asian market strategies, unit trusts offer a far broader selection:
- Over 300 unit trusts focused on Asian markets, compared to 46 ETFs on SGX.
- Greater variety in terms of sector-specific, thematic, and country-specific strategies.
Investors looking for tailored exposure to Asia may find unit trusts a more versatile option than ETFs.
Final Thoughts: Are Unit Trusts Worth the Higher Fees?
Unit trusts have often been criticized for their higher fees, but as we’ve seen, they offer advantages that ETFs and index funds do not—particularly in areas like monthly income, forex hedging, estate tax planning, CPF/SRS investing, and access to niche strategies.
While low-cost investing works for many, there are situations where it makes sense to look beyond fees and focus on structure, tax efficiency, and income planning.
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