Work out how sales, switching and redemption charges reduce the money that actually gets invested.
Arjun is 28 and put S$5,000 into a unit trust last month (Arjun and all the figures below are invented examples). At lunch he tells his colleague Wei Ling that the investment is already down. The market has hardly changed, yet his app values the holding at about S$4,850.
The gap comes from a 3% sales charge, which cost him S$150 when he bought. The seller kept that money and it was never invested in the fund, so the fund itself is fine. A sales charge is one of three one-off charges a unit trust can carry. You pay each of them once per transaction: one when you buy, one when you switch and one when you sell. Charges taken every year are covered in Lesson 2.2, "Yearly charges: management fee, expense ratio and trailer fee".
A sales charge is a percentage taken off your money before any units are bought. You may also see it called a front-end load or an initial charge. Less money is left to buy units with, so your holding starts below what you paid by the amount of the charge. The charge goes to the seller and never reaches the fund. A new holding can therefore show a loss straight after purchase while the market is flat and the fund is sound, which is what Arjun's app was showing.
To count your units, start from what you paid in and take off the sales charge, which is normally a percentage of that gross amount. Then divide what remains by the NAV per unit.
Using S$5,000 and a NAV of S$2.00 per unit:
With no sales charge, the full S$5,000 goes in and buys 2,500 units. With a 1% charge, S$50 goes to the seller and the remaining S$4,950 buys 2,475 units. With a 3% charge, which is Arjun's rate, S$150 goes to the seller and the remaining S$4,850 buys 2,425 units.
After losing 3% at the start, the fund has to gain a little more than 3% before the holding is worth S$5,000 again.
These figures use the method most funds use, where the percentage is applied to the gross amount you hand over. A few funds quote the charge another way, which gives a slightly different unit count. The prospectus says which method the fund uses. To check what was actually done, look at the unit count on your transaction confirmation and compare it with your own figure. Lesson 1.2, "Why your fund's price arrives a day later", explains that document.
An offer of units in a unit trust must be made in or accompanied by a prospectus and a Product Highlights Sheet registered with MAS. The rules on how a fund must disclose its fees, including any maximum sales charge, are set out in the MAS Code on Collective Investment Schemes, so check that code on the MAS website for the current requirements. Where your fund's documents give a maximum sales charge, treat it as a ceiling. Below the ceiling, the distributor sets the actual rate. The distributor is the bank, fund platform or adviser that sells you the fund. The same fund can carry quite different rates depending on which channel you buy through. Don't assume you will pay the maximum, and don't assume you won't.
Arjun's documents gave the maximum as "up to 5%". He expected to pay less, and he paid 3%. He could also have checked whether a different channel sold the same fund for less.
Before you buy, look in the prospectus and the Product Highlights Sheet for any maximum sales charge. Then ask the seller for the actual rate in writing, and check whether another channel offers the same fund for less. Module 3 compares distribution channels in detail. Once the purchase has gone through, check the rate on your confirmation.
A switching charge applies when you move money from one fund to another, usually within the same fund manager's range. It is often lower than a full sales charge, but distributors handle switches differently. Some let you make a limited number of switches a year with no charge. Others treat a switch as a new purchase and apply a full sales charge to the fund you move into. Before you switch, ask your distributor which of the three applies: a switching charge, a waiver or a full sales charge.
A redemption charge comes out of your proceeds when you sell. It is also called an exit charge or a realisation charge. Many retail funds in Singapore don't have one, but some do. Some funds charge a higher redemption charge on units sold within a set period after buying. The prospectus states when the charge applies and whether it drops away the longer you hold.
Suppose Arjun later sells S$6,000 of units in a fund with a 1% redemption charge. He pays S$60 and receives S$5,940.
The real cost of a one-off charge depends on how many years you keep the fund. For a rough figure, estimate your holding period in years and divide the charge by that number. Kept for 1 year, a 3% sales charge costs about 3% for that year. Over 3 years it is about 1% a year, and over 10 years about 0.3% a year. This division leaves out compounding, but it is accurate enough for comparing options.
One-off charges cost two kinds of investor the most. If you trade often, each switch or new purchase can bring a new charge, and these small amounts add up. If you may need the money soon and sell within a year or two, the sales charge takes a large share of what the fund earns over that time. If you hold for decades, yearly charges usually matter more than one-off charges. Treat that as a claim to check for yourself. In Module 7 you put one-off and yearly charges into one model and test it.
Before every 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? Once he has the answers, he can put a number on any one-off charge and weigh it against how long he plans to stay invested.
The activity below gives you a S$5,000 investment and three sales charges to work through. Pick any NAV you like and work out how many units each charge leaves you with. Comparing the results shows you how each charge changes the number of units you would actually own.
Pick a NAV. For a S$5,000 investment, work out how much gets invested and how many units you buy at sales charges of 0%, 1% and 3%.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).