Today, we’ll take a look at:

Q: Will my unit trust holdings ‘disappear’ along with the collapse of major US banks?

We first need to understand the structure of a unit trust. I draw your attention to some extracts from the national financial education program “Moneysense” website on “Making Sense of Unit Trusts”.

http://www.moneysense.gov.sg/resource/publications/guides_publications/MoneySENSE_UT_Guide.pdf

On page 2

You will learn that one of the merits of unit trust is that it invests in a wide range of assets and this means that your risk exposure to any single company collapsing is not likely to wipe out your investments. If however, you are holding on to individual stocks or have direct investments (not unit trust) with a bank that went down, your risk exposure will be much higher and can be adversely impacted.

It is also interesting to note that during bad times when some firms collapse, surviving companies that ride through the crisis will have a bigger market share moving forward.  Hence, a diversified fund will cushion your fall during the bad times and allow you to benefit from the potential higher profitability of surviving firms. These will be companies with good balance sheets, strong management and successful businesses.

On page 15

http://www.moneysense.gov.sg/resource/publications/guides_publications/MoneySENSE_UT_Guide.pdf

You will see one of the most important features of the underlying structure of a unit trust - the fact that it is called a unit trust means that investors’ money are held in a trust where an independent party called the trustee is appointed as custodian of the fund’s assets.  The trustee ensures that the appointed fund managers are managing the fund according to guidelines laid out in the trust deed to minimize the risk of mismanagement by the fund managers.

As an investor, you can be rest assured that your investments are held in trusts and the funds are separated from the fund managers’ assets (which can be taken away by creditors).

In essence, Unit Trusts offer:

1. Security (trust structure)
2. Protection from single market calamity (through individual fund & portfolio diversification)
3. Certainty (given time, diversified investments have historically recovered)

The next concern that many investors have now is: ‘How does the Monetary Authority of Singapore ensure that unit trusts here are in safe hands?

Check out the reply tomorrow.

Filed under: US Financial Crisis