What Are Mutual Funds and Unit Trusts? A Beginner’s Guide for Singapore Investors

What are mutual funds and unit trusts?

Want to grow your wealth but don’t have time to track the stock market? You’re not alone. 

Many investors want to build their financial future but don’t have the expertise or the hours in a day to actively manage their investments. That’s where mutual funds and unit trusts come in.

These funds let you pool your money with other investors, giving you access to a professionally managed portfolio of stocks, bonds, or a mix of both, without the hassle of picking individual investments yourself.

But how exactly do they work? And more importantly, how do you know if they’re the right investment for you?

In this guide, we’ll break it all down. No complicated jargon, just clear and practical insights to help you get started.

Characteristics of mutual funds and unit trusts

Mutual funds (and unit trusts) come with unique features that set them apart from other investment options. 

Here are some key characteristics to keep in mind:

#1 – Designed for mid-to-long-term investing

Think of mutual funds like planting a tree. You won’t see massive growth overnight but with time and patience, your investment has the potential to grow. 

Since they invest in assets like stocks and bonds, both of which can experience short-term ups and downs, it’s important to adopt a longer investment horizon. 

This allows you to ride out market fluctuations and maximise potential returns.

#2 – Professionally managed

If you’re not a fan of researching stocks and tracking the market daily, good news! Mutual funds are actively managed by professional portfolio managers. 

These fund managers are backed by research teams to analyse market trends and make investment decisions on your behalf. 

This hands-off approach saves you time and allows you to benefit from professional insights. 

Though it’s worth noting that while mutual funds aim to outperform market indices, returns are never guaranteed.

#3 – You invest through third-party financial institutions

If you’re used to buying stocks directly on an exchange like the SGX, mutual funds work a little differently. 

They are typically purchased through third-party distributors such as banks or financial institutions. 

While this makes them accessible to a wide range of investors, it also means additional fees or commissions may apply, which can impact overall returns.

#4 – Priced and traded once per day

Mutual funds are priced based on their Net Asset Value (NAV), which is calculated at the end of each trading day.

This means you can only buy or sell at the daily closing price. 

While this means you’re less tempted to react to daily market noise, the flip side is that it limits your ability to make immediate trades in response to market changes. 

Why you might choose to invest in a mutual fund or unit trust

Mutual funds and unit trusts offer a convenient way to grow your wealth without the need for constant market monitoring or extensive financial knowledge. 

Here are some key benefits:

#1 – Low barrier to entry

You don’t need a fortune to start investing. 

Some funds have a minimum investment of just SGD 1,000, and if you opt for a Regular Savings Plan (RSP), you can start with as little as SGD 100 per month. 

With an RSP, a fixed amount is automatically deducted from your account and invested every month. 

This allows you to take advantage of dollar-cost averaging, which helps smooth out market volatility and reduce the risk of investing at the wrong time.

#2 – Professional expertise

If analysing stock charts and tracking economic trends isn’t your thing, mutual funds and unit trusts give you access to experienced fund managers who make investment decisions on your behalf. 

These professionals use research, risk management strategies, and market insights to optimise returns. 

#3 – Diversification

Investing in just one or two stocks can be risky, if one company underperforms, your entire portfolio takes a hit.

 Mutual funds and unit trusts spread your investment across multiple companies, industries, and even countries, helping to reduce the impact of a single poor-performing asset. 

For example, the Nikko AM Shenton Emerging Enterprise Discovery Fund holds shares in 89 companies across India, Taiwan, South Korea, and China. 

This broad exposure helps balance risks while keeping your portfolio resilient.

#4 – Liquidity

Unlike some long-term investments, mutual funds and unit trusts can be bought and sold online relatively easily, giving you flexibility if your financial situation changes.

Downsides of Investing in Mutual Funds or Unit Trusts

While mutual funds and unit trusts offer many advantages, they also come with some drawbacks. Here’s what to keep in mind:

#1 – Lack of control

When you invest in individual stocks, you decide which companies to buy and sell. But with mutual funds, the fund manager makes all the investment decisions. 

This means you have no say in which stocks or industries your money is allocated to.

While funds generally are restricted from investing outside its pre-determined mandate, if the fund takes a direction you’re not comfortable with, your only option is to sell your holdings.

#2 – Potential underperformance

Not all fund managers beat the market. While mutual funds aim to outperform benchmarks, there’s no guarantee they will. 

Some funds have strict investment mandates that limit how much can be allocated to specific sectors, which may prevent them from fully capitalising on high-growth opportunities. 

High management fees can also eat into your returns, making it even harder to outperform lower-cost alternatives like ETFs.

#3 – Trading limitations

Unlike stocks and ETFs, which you can buy and sell at any time during market hours, mutual fund transactions only occur once a day—at the fund’s Net Asset Value (NAV), calculated at market close. 

This means you can’t react immediately to sudden market movements, which can be a disadvantage during periods of high volatility.

#4 – Fees can eat into returns

Mutual funds typically charge management fees, expense ratios, and sometimes sales charges, all of which reduce your overall returns over time. 

To illustrate:

A seemingly small 0.5% difference in fees resulted in $3,781 less in final value after 20 years. Over an even longer period, the gap would widen further, demonstrating why low fees matter.

Who could benefit from investing in mutual funds or unit trusts?

#1 – You don’t have time to manage your investments

If you’re a busy professional, a business owner, or simply someone who prefers a hands-off approach, mutual funds allow you to delegate investment decisions to professionals. 

Instead of researching and selecting stocks, monitoring economic trends, or making trades yourself, a fund manager does the heavy lifting for you.

#2 – You want diversification without a huge budget

Buying multiple stocks to diversify your portfolio can be expensive. But with a mutual fund or unit trust, your money is automatically spread across hundreds of stocks, bonds, or assets. 

Instead of picking and managing 50 different stocks yourself, a mutual fund does it for you. You get exposure to multiple industries and regions in one single investment.

This helps you manage risk without needing a huge initial investment.

#3 – You’re a beginner and want a simple way to start investing

Are you new to investing and not sure where to start?

Mutual funds are beginner-friendly because they don’t require deep market knowledge. 

Instead of worrying about stock selection, asset allocation, or rebalancing your portfolio, a fund manager makes these decisions for you. 

Plus, with a Regular Savings Plan (RSP), you can start investing with just SGD 100 per month.

This makes them an accessible option for younger investors looking to build long-term wealth without taking on too much risk upfront.

What types of funds can you invest in?

You’ll come across different types of mutual funds and unit trusts tailored to various investment strategies. 

Whether you're looking for stability, growth, or exposure to a specific industry, there’s a fund that fits your needs.

Broadly, funds fall into three main categories:

#1 – Asset Class Funds

These funds focus on different types of investments (asset classes), such as stocks, bonds, or a mix of both. 

Read our complete guide to the best bond funds in Singapore.

Equity funds aim for higher returns but come with more volatility, while bond funds offer more stability with lower potential returns. 

Balanced funds provide a middle ground by blending both asset types. 

Besides equities and fixed income, there are also funds that invest in other asset classes such as money market funds, commodities, and real estate. 

#2 – Geographical Funds

If you want to invest in specific regions or countries, geographical funds offer exposure to markets such as Asia, Europe, or the U.S. 

Some funds concentrate on emerging markets with high growth potential, while others focus on developed economies for more stability.

#3 – Thematic Funds

These funds are designed around specific investment themes or trends, such as technology, healthcare, sustainability, or artificial intelligence. 

Thematic funds allow investors to capitalise on industries or innovations they believe will drive future growth. 

For example, if you believe AI and cloud computing will dominate the future, the Eastspring Global Technology Fund invests in leading tech firms worldwide.

These categories aren’t mutually exclusive. 

For example, a fund investing in semiconductor companies based in Asia could be both a geographical and thematic fund. 

Ultimately, the best choice depends on your investment goals, risk tolerance, and market outlook.

Mutual Funds vs Stocks vs ETFs: What’s the Difference?

When deciding where to invest, it’s important to understand how mutual funds, stocks, and exchange-traded funds (ETFs) compare. Each has its own characteristics, risks, and potential rewards.

Are mutual funds and unit trusts different?

You’ve probably heard the terms mutual fund and unit trust used interchangeably. In Singapore, both function similarly as collective investments and are regulated by the Monetary Authority of Singapore. 

The main difference lies in their legal structure.

Despite this distinction, for investors, the difference is just administrative. 

Whether you invest in a mutual fund or a unit trust, both provide professional management, diversification, and access to a broad portfolio of assets.

What would Beansprout do?

Mutual funds and unit trusts can be great tools for building wealth, but like any investment, they come with trade-offs. 

Understanding the pros and cons will help you make informed decisions that align with your financial goals, risk tolerance, and investment horizon.

However, it is important to take the time to research different funds, compare fees, and ensure they match your investment strategy. 

To find a mutual fund that allows you to earn a higher potential yield in a relatively safe way, check out our guide to the best money market fund in Singapore. 

To find a mutual fund that allows you to generate income, check out our guide to the best bond funds in Singapore. 

You can use our resources on mutual funds as a starting point too! 

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