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Thursday, October 26, 2006

Buy unit trust through a financial adviser?

There are more than 300 unit trusts and insurance funds available for the public to invest.

The financial adviser can select the best performing funds and offer them to the investing public.

There is a danger in this approach.

The funds that perform well in the past may not perform well in the future. In fact, the academic studies have shown that actively managed funds generally perform worse than index funds, after deducting the fees.

In fact, if an fund has performed well by adopting a certain strategy, it is likely that the same strategy will perform below average in the future, as the results go in cycles.

So, if a financial adviser ask you to invest in a fund that performed well (and it is easy for them to pick these funds from the large numbers in the market), you are likely to make the wrong choice.

It is better to invest in a large, well diversified fund with low charges. Indexed funds fall in this category.

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