How to Minimize the Upfront Service Charge in Unit Trust Investment

Investment always requires transaction cost. The typical cost in unit trust investment is the upfront service charges (paid to the agent), management fees (paid to the fund managers), and trustee fees (paid to the trust corporation). These costs are inevitable. But when there is a problem, there is always a few strategies to minimize the damage.

How to Minimize Investment Cost in Unit Trust

Saving at the upfront means you had successfully make the better first step compared to the others. Adding the compounding interest effect, the investment cost you save will snowball into a big chunk later. Here are five strategies:

• Construct your own balance portfolio instead of buying Balanced Funds

• Become a unit trust agent (required to pass an exam and maintain your account active with the minimum business brought in every year)

• buy new fund which offer lower service charges during offer period

• lock in the low service charges offer with auto debit standing instruction

• buy funds from the same companies which only charge low switching fees whenever you need to do switching or portfolio rebalancing. If you buy different funds from different fund house, you would have to redeem the unit and purchase again when you are switching from Fund House A to Fund House B.

In this article, I will share with you another advanced strategy, which is actually inspired by one of my brilliant client. He is my course mate, my best friend, my musician buddy, and also one of my business venture partner.

Most New Funds Offer Lower Service Charge

As we all know, most new funds provide promotional offer during initial offer period. For example, the recent launch of Public Sector Select Fund (PSSF) and Public Islamic Sector Select Fund (PISSF) is offering investor a promotional service charge of 5.45% of NAV per unit instead of the normal 6.5%. Public Mutual might be the most generous company in new fund offering. Other company do provide similar offer as well. Some companies will give promotional offer for investment amount of more than RM10,000. When you are buying new funds, this is the benefit you will be getting.

Recently, Public Mutual also promotes heavily for investor to initiate standing instruction for dollar cost averaging. If you keep on investing into the new funds using auto debit from your account monthly, you will still enjoy the same low rate of 5.45% service charge.

The only reason not to invest in new fund (besides not having the budget) is that the fund investment strategy might not suits your appetite, or don’t fit well into your investment portfolio. So here is the trick!

Photo by rashdan

Switch to Suit your Portfolio

Once you had bought the new fund with low service charge, you can now switch to other funds that suits your appetite. The only charges you need to pay is the RM25 switching fees. Many companies charge a flat RM25 switching cost. If you know any other company that in fact charges lower, or free of charge, please inform us using the comment section below.

In this case, you will save 1.05% but still get to invest in the fund that suits your portfolio.

Beware

• The switching fees is RM25 per switch. If you only invest RM1000, RM25 is 2.5% of your total investment. So this strategy is only workable if you are investing more than RM2500. The saving of 1.05% is RM26.25. It is just enough to cover the switching fees.

• Timing is also a matter to consider. If the new fund make a loss, but the fund you intend to switch into is making profit, you might have missed the boat. But nobody can ever correctly time the market. Moreover, the initial offering period is normally 3 weeks. A lot of things can happen in 21 days. Disaster comes without warning.

• If you are going to use this trick, inform your agent so that you can get all the documents done in one shot. If not, your agent would have to meet you again to sign the switching form later. It is a long term relationship with your agent. Don’t make fool of them if you are expecting a great level of service.

Do you love this trick? Download my free ebook for more tricks that’s not known to you.