Which is better? Stocks vs Unit Trusts

Key Takeaways

1. For individuals who are looking to start investing in a safe and sound way, there are different asset classes to consider.

2. Stock investing offers the benefits of typically having lower fees compared to unit trusts and allows investors to customise their portfolios.

3. Investors who choose to put their money in unit trusts may enjoy the benefits of diversification through a professionally managed portfolio.

When it comes to investing, everyone has an array of options to choose from. Each option offers unique advantages and considerations. One of the questions an investor may ask is, “Should I invest in individual stocks or unit trusts?”

In this article, we take a deep dive into the basics of stocks and unit trusts. We also discuss the advantages of investing in stocks and unit trusts.

What are stocks?

Stocks, shares, and equity refer to the same thing - having ownership in a company. If you own stocks in a company, you are known as a shareholder. This means that you are a legal owner of the company.

Of course, that’s not to say that just because you own a single stock means that you own the entire company. A company can be broken up into millions of stocks. Holding one unit of stock entitles you to only one unit of ownership.

As a shareholder, you are entitled to vote during the annual general meeting (AGM). An AGM is when the executives and directors of the company present key issues to the company owners, also known as the shareholders. Shareholders decide whether to vote for or against those issues.

What are unit trusts?

While stocks represent ownership in a single publicly listed company, unit trusts represent a pooled portfolio of stocks. This portfolio of stocks is managed by a team of professionals who are known as fund managers.

When you own a single unit of the unit trust, you essentially own a part of all the stocks within the unit trust portfolio.

Let’s use an analogy to illustrate this concept. If a stock is a fruit, all the stocks of an individual company would represent a single fruit tree.

Since unit trusts are a pooled portfolio of stocks from different companies, owning a unit trust gives access to variety of hand-picked fruits. It is almost like having access to an entire orchard.

Generally, unit trusts have a thematic focus, which can be in one of these three broad categories:

• 1. Asset type (e.g. Equity vs bonds)
• 2. Geographical location (e.g. Region vs country)
• 3. Investment themes (e.g. Dividend vs Artificial Intelligence vs Growth)

For example, an artificial intelligence-focused unit trust focuses purely on AI-related stocks without any restriction on geographical location.

On the other hand, a global unit trust may focus on investing in a wide range of stocks around the world.

What is better – stocks or unit trusts?

#1 – Difference in Fees

For individual stocks, since you are making the investment decision yourself, the costs will largely be from the trading commission fees incurred. This makes stocks a more cost-efficient option compared to unit trusts.

As unit trusts are managed by professionals, they usually involve management fees. In the case of unit trusts, investors who buy into the unit trust will need to cover the cost of managing a unit trust.

Other fees that come with unit trusts include administrative costs, custodian fees, legal fees, and marketing expenses. To make it easier for investors, you can get a holistic view of the overall expenses of the unit trust based on the expense ratio.

#2 - Ability to customise portfolio

If you were to buy individual stocks, you have the flexibility to choose the stocks you like. You can even choose a few varieties to spread out your risk.

Using our earlier analogy, buying unit trust is like buying into a few varieties of fruit trees you believe will give you a good harvest. You can choose the trees you want within the same orchard but not across different orchards.

#3 – Diversification

Unit trusts offer an investor the opportunity to buy into a portfolio of stocks. Having a portfolio of stocks increases diversification of risk. When the value of one stock goes down, other stocks which may have appreciated can balance out the loss.

For example, the minimum number of stocks you need to buy on the Singapore exchange is 100. As a result, you may require a sizeable amount of capital if you want to start investing with a portfolio of the three banks in Singapore.

Not everyone has so much cash on hand to create their own portfolio of diversified stocks. However, if you buy unit trusts, you get to buy into a portfolio of diversified stocks even if you don’t have much capital to invest.

Diversification is one important reason why investing in a unit trust may make more sense than individual stocks.

#4 - Management of stocks or unit trusts

Stocks are managed directly by owners. As an owner, you would need to perform your own due diligence and pick the right stocks to own.

As it may sometimes be difficult for investors to become experts on various industries and companies, they can depend on professionals who are trained to analyse companies and recommend which are the more likely ones to succeed.

For unit trusts, buy and sell decisions are made by professionals who manage multiple client portfolios daily. These professionals will pick the stocks after investigating the prospects of many companies and put them into a fund.

What Would Beansprout Do?

There’s no one-size-fits-all solution when it comes to investing. You need to understand your own investment needs, risk appetite, knowledge of market movements and your personal level of monetary commitment and knowledge of the markets to manage your investment portfolio.

Also, let’s not forget that your investment strategy can change from time to time. It doesn’t mean that once you start investing in unit trust, you are out of the game for individual stock investments.

When you accumulate enough capital, you can start building your own investment portfolio with individual stocks too. The reverse is also true. Just because you choose not to purchase unit trusts now, it doesn’t mean you can’t invest in unit trusts later.

If you are looking to start your investment journey, get started with Citi Plus. Start planning for your financial independence today and discover how you can achieve your financial goals, your way. Whether it’s improving your financial literacy, saving more, or investing better, you can take the first step towards financial independence with Citi Plus and enjoy up to S$656 in welcome rewards (Terms and Conditions Apply¹).

Disclaimer

This research is commissioned by Citi in collaboration with Beansprout, an MAS-licensed platform offering individuals simple financial guidance. Gerald Wong, CFA, has more than 10 years of experience in the investment advisory industry, and is passionate about helping others make better investment decisions.

This article is for general information only and is not intended to be a forecast of future events nor a guarantee of future results and should not be relied upon as financial advice. All views and opinions are as of the date hereof, and are subject to change based on market and other conditions without notice. The article has no regard to the specific objectives, financial situation and particular needs of any specific person. It is neither an offer nor a solicitation to purchase, nor endorsement or recommendation of any products or services mentioned therein, and the products or services mentioned may or may not be offered by Citibank Singapore Limited, its related entities and their respective directors, agents and employees (together "Citigroup").

This article and its contents do not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution, offer or solicitation is not authorised or to any person to whom it is unlawful to distribute such information or make any offer or solicitation.

Citigroup is under no duty to update this article and shall not be liable for any complaint, suit, action, claim, expense, loss or damages directly or indirectly arising out of or in connection with any person’s reliance on, or acting upon, or use of, any contents on this article. The article is subject to amendment without notice. Investment Products are (i) not insured by any government agency; (ii) not a deposit or other obligation of, or guaranteed by, the depository institution; and (iii) subject to investment risks, including possible loss of the principal amount invested. The information contained herein is not intended to be tax or legal advice, or an exhaustive discussion of the strategies or concepts mentioned herein. Please seek advice from your tax, legal or financial adviser as appropriate about the contents discussed herein or before investing in any investment products. Should you choose not to seek such advice, you should carefully consider the risks associated with any investments and make a determination based upon your own particular circumstances and assess whether such investment product is suitable for you.