You will be able to calculate the effect of sales, switching and redemption charges on the money that gets invested.
Wei Ling's colleague Arjun, 28, tells her over lunch that he put S$5,000 into a unit trust last month and it is already down. When he opens the app, the market has barely moved, but his holding shows about S$4,850. Nothing has gone wrong with the fund. He paid a 3% sales charge on the way in, and the S$150 never reached the fund at all.
This lesson covers the charges you pay when you buy, switch or sell, the ones that happen once per transaction. Lesson 2.2, Yearly charges: management fee, expense ratio and trailer fee, covers the ones that come out every year. All figures here are examples.
A sales charge, sometimes called a front-end load or initial charge, is a percentage taken from the money you pay in before any units are bought. Less of your money buys units, so you start behind by the amount of the charge.
Take S$5,000 and a NAV of S$2.00 per unit. With no sales charge, all S$5,000 is invested and buys 2,500 units. A 1% charge sends S$50 to the seller and leaves S$4,950 to buy 2,475 units. At 3% the seller takes S$150, so only S$4,850 goes in and Arjun owns 2,425 units. To get back to the S$5,000 he paid, his fund now has to rise by just over 3%.
Read the method in the prospectus, because funds do not all express the charge the same way. Most take it as a percentage of the gross amount you hand over, as above. A few quote it differently, which changes the units by a small amount. The units on your confirmation, from lesson 1.2, Why your fund's price arrives a day later, will tell you which method was used.
The prospectus and the Product Highlights Sheet show the maximum sales charge the fund allows, which works as a ceiling. Below it, the distributor decides how much to charge you, whether that distributor is a bank, a fund platform or an adviser. For the same fund, the rate can differ a lot from one channel to the next.
So never assume the maximum applies to you, and never assume it does not. Ask the person selling the fund for the actual rate in writing before you buy, and check it on the confirmation afterwards. Arjun had read "up to 5%" in the documents and assumed he would pay less. He did, at 3%, but he could have asked whether another channel charged less for the same fund. Module 3 compares channels in detail.
Two more one-off charges apply when you move money or take it out.
A switching charge applies when you move from one fund to another, usually within the same manager's range. It is often lower than a full sales charge, and some distributors waive it for a limited number of switches a year. But a switch through a distributor that treats it as a fresh purchase may charge a full sales charge on the new fund, so check before you switch.
A redemption charge, sometimes called an exit charge or realisation charge, is taken from the proceeds when you sell. Many retail funds in Singapore have none, but some do, and some charge more if you sell within a set period after buying. If Arjun later sold S$6,000 of units in a fund with a 1% redemption charge, S$60 would come off and he would receive S$5,940. The prospectus sets out when these charges apply and whether they fall away over time.
A one-off charge is paid once, so how much it hurts depends on how long you hold. A useful rough check is to spread it over your holding period. A 3% sales charge on a fund held for one year costs you about 3% for that year, while over three years it works out at about 1% a year and over ten years at about 0.3% a year. This simple division ignores compounding, but it is close enough to compare options.
That is why one-off charges matter most to two kinds of investor. The first is someone who trades often. Every switch or new purchase can bring a fresh charge, and the costs pile up even if each one looks small. The second is someone who might need the money soon. If you might sell within a year or two, a sales charge takes a large slice of whatever the fund earns in that time.
For someone holding for decades, the yearly charges usually matter more than the one-off ones. That is a claim you can test yourself in module 7, when you put both kinds of charge into one model.
Before the next purchase, Arjun now asks three questions. What sales charge will I actually pay on this amount? What will it cost to switch or sell, and does that change if I sell early? How long do I expect to hold this fund? With answers to those three, any one-off charge turns into a number he can weigh.
The activity below gives you a S$5,000 investment and three sales charges to work through, using a NAV of your choice, so you can see the effect on the units you would actually own.
For a S$5,000 investment, calculate the amount invested and units bought at sales charges of 0%, 1% and 3%, using a NAV of your choice.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).