The long-term cost of unit trusts

06 June 2024

10 minute read

Smart investing isn't just about choosing the right assets – it's also about choosing the right instruments. While unit trusts are a popular investment vehicle, their layered fee structure can significantly diminish an investor’s returns over time.

Total assets under management (AUM) for Collective Investment Schemes in Singapore, which include unit trusts, came in at a staggering S$127 billion in 2022. Assuming an average total expense ratio of 1.75%, investors are collectively paying about S$2.2 billion in fees alone – per year! That's a substantial sum, most of which could otherwise be compounding and growing in their portfolios.

Let's take a closer look at the costs associated with unit trusts and explore just how substantial the impact of fees can be on long-term growth.

Key takeaways 

  • Understanding the costs of different investment vehicles is essential. Every dollar paid on fees is a dollar that could otherwise be compounding and growing.
  • Unit trusts are often actively managed and come with a complex fee structure. Common costs associated with unit trusts include: upfront, redemption, switching, platform, and management fees, alongside other expenses.
  • StashAway provides a straightforward and transparent cost structure, with a single management fee, and no setup, exit, or transfer fees.
  • High fees can severely impact investment returns, leading to significantly lower wealth accumulation over the long run.

The many costs of unit trusts 

Traditional unit trusts often come with a complex fee structure, including one-off initial costs, ongoing fees, and even fees charged upon redemption. While these fees might seem manageable initially, they can have a significant impact on your investment returns over the long term. Often, they’re also built to lock you in – even when there isn’t any actual lock on the investment – by making a change expensive.

The total expense ratio (TER) of investing in a unit trust consists of two main components: fees that you pay directly and fees that are reflected in the Net Asset Value (NAV), or the price of the fund. Here are some of the common ones you might encounter.

One-time fees out of your pocket:

  • Upfront fee: Also known as a "front-end load" or "initial sales charge", this is a fee charged when you first invest in a unit trust, typically 1.5% to 5% of your investment amount. This fee may be lower when there is a promotion or you subscribe online.
  • Redemption fee: Some unit trusts charge a fee upon redemption, further reducing your returns. This fee can range from 1% to 5% of the redemption amount.
  • Switching fee: Unit trusts may charge a switching fee when you switch from one fund to another, even if they’re both under the same manager. This fee is usually a percentage of the amount being switched, typically about 1%.
  • Platform/wrapper fee: Some investment platforms or brokers may charge an additional fee just for providing access to unit trusts. This fee ranges from 0.3% to 1% per year.

Annually recurring fees:

  • Management fee: Unit trusts charge an ongoing annual management fee, usually between 1% to 2% of your total investment value. About half of this is paid to the distributor, like the bank. Simply put, a large chunk of what you pay isn’t directly used for managing your investments.
  • Administration fee: This fee covers the administrative costs of running the fund, such as accounting, valuation, and reporting expenses. It is usually a percentage of the fund's assets, generally falling between 0.1% to 0.5% per year.
  • Custodian fee: This fee is charged by the custodian or depository institution that holds the fund's assets for safekeeping. It is usually a percentage of the fund's assets, commonly ranging from 0.01% to 0.1% per annum, depending on the size and complexity of the fund.

And this still isn’t an exhaustive list! Remember that these costs can vary depending on the unit trust and the institution offering it. Always read its factsheet to better understand the fee structure before investing in a unit trust.

Source: MoneySense, StashAway

StashAway’s fee structure

In contrast to the complex and often hidden fees associated with traditional unit trusts, StashAway offers a simple and transparent fee structure – no setup, exit, or transfer fees. We charge a single management fee that ranges from 0.2% to 0.8% per year. Plus, as you accumulate more investments with StashAway, your overall fee percentage lowers automatically, with no added conditions.

This pricing is designed to keep your costs low and predictable, maximising your potential returns by letting you keep more of what you earn.

Investment portfolios (General Investing, Responsible Investing, Thematic Portfolios and Flexible Portfolios)

  • StashAway management fee: 0.2% - 0.8% p.a.

A progressive tiering system where fees decrease as you invest more.

  • ETF expense ratio: 0.2% p.a. (approximate average)

This is an expense charged by the underlying ETF manager, and reflected in the NAV. You can view the expense ratio for each ETF in your StashAway portfolio at any time. ETF expense ratios are low because there are no rebates to investment managers baked in. 

Cash management (Simple)

  • StashAway management fee: 0.15% p.a. for Simple
  • Net expense ratio: 0.15% p.a. for Simple

100% of any trailer fee rebates from the underlying fund managers are returned to you.

Private markets (Private Equity, Venture Capital, Private Credit and Angel Investing)

Side-by-side comparison

Unit trustsStashAway (ETFs)
One-time fees out of your pocket
Upfront fee1.5% - 5%Starting is free
Redemption fee1% - 5%Withdrawals are free
Switching fee1%Portfolio transfers are free
Annually recurring fees
Platform/wrapper fee0.3% - 1% p.aNot applicable
Management fee1% - 2% p.a.0.2% - 0.8% p.a. (reducing as you accumulate more assets) + GST
Other expenses: E.g. operations, administrationor custodian0.1% - 0.6% p.a.Approximate average of 0.2% p.a., charged by fund manager

The real impact of fees 

The power of compounding can have a significant impact on your investment returns, but high fees can severely dampen its effect. Compounding refers to the effect where your investment grows not only from its original amount, but also from the returns generated over time. Basically, earning returns on returns, which leads to exponential growth.

Lower fees not only preserve more of your initial capital, they also allow more of your money to remain invested and compounding, leading to significantly greater wealth accumulation over the long run (all else being the same). This is why paying attention to fees is crucial for building wealth.

To illustrate this, let's consider an example of a $200,000 investment over a 20-year period, assuming an annual return of 9% and average fees:

Unit trustStashAway
Upfront fee$5,000 (2.5%)$0
Redemption fee$16,389 (2.5%)$0
Platform fee$64,845 (0.65% p.a.)$0
Management fee$149,643 (1.5% p.a.)$69,066 (0.675% p.a.)
Other expenses$34,917 (0.35% p.a.)$21,487 (0.21% p.a.)
Total fees after 20 years$270,794$90,553
Investment value after 20 years$639,172$954,009

Note: StashAway management fee based on StashAway pricing tiers for a $200,000 investment, underlying ETF expense ratio based on an SRI 22% General Investing portfolio.

By moving $200,000 away from a unit trust to StashAway, you potentially save $180,241 in fees alone. And because these additional costs reduce the effects of compounding on returns, that amounts to a total difference of $314,836 (a 39.5% difference!) over a 20-year period.

Investing like it should be 

Knowing the complete fee structure is an important step in determining what will best align with your needs. Apart from cost savings, our portfolios have several other advantages:

Risk management: Our ERAA® investment framework uses macroeconomic data to pinpoint where we are in the broader market cycle, adjusting strategic allocations to maintain your risk constant. This data-driven approach maximises returns while managing your risk for you.

Accessibility: Besides lower fees, our portfolios have no minimum investment amounts, no monthly requirements, and no lock-in periods. This is investing like it should be: simple and straightforward.

Flexibility: Your investing journey should be able to adapt to your financial goals. Unlike unit trusts, where changes in investment strategy or withdrawals may incur costs, you can adjust your risk level or withdraw from your portfolio at any time – no charge.

Support: An informed investor is an empowered investor. From our monthly CIO Insights, which deep dive into a variety of investment topics, to our Weekly Buzz newsletters, which keep you updated on what’s going on in the markets, you’ll have the resources you need to make informed decisions. Sign up for free!

The smarter approach to investing 

Don't let fees hold you back from achieving your financial goals. With a smart, cost-effective approach to investing, you can keep more of the returns you’ve earned. Every dollar you save on fees is a dollar that can continue to work for you, compounding over time.

Ready to make your money work harder for you? Explore StashAway’s General Investing portfolios, which are tailored for a range of risk profiles, and take a step towards smarter investing.

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