High returns are often a fund’s most appealing feature, supported by findings from our Wealth Insights Report, which showed that projected returns emerged as the top consideration for investors in Singapore and Hong Kong. However, if you rely on this single factor to choose a fund, you are overlooking other factors that are just as important, such as risk.

This article will break down 6 key metrics you will commonly find in a unit trust’s factsheet. From projected returns to fee structures, these metrics will help you evaluate the performance of unit trusts and choose the appropriate ones from this wide universe to fit in your portfolio. Or, if you have already invested in unit trusts, these metrics will be helpful during reviews of your portfolio performance.

1. Risk-adjusted return

A common beginner mistake is to evaluate an investment’s suitability just by looking at historical or projected returns. When it comes to investments, returns should always be evaluated against the amount of risk taken to ensure that you are appropriately compensated for.

For instance, two funds – Fund A and B – have the same average annual return of 10%, but Fund A’s average annual volatility of 15%, while that of Fund B is 10%.

Logically, Fund B is preferred because it has delivered more stable performance. What this means for you is that if a market drawdown coincides with the time you liquidate your investments, there is some downside protection that keeps the magnitude of the price drop smaller than that of Fund A.

A more stable fund could also provide better reassurance for risk-averse individuals. Oftentimes, investors, spooked by dramatic drawdowns, act against logic to withdraw their investments at market lows. With a fund that fluctuates less dramatically, it could help the risk-averse to stay invested – a key ingredient for investing success. 

These are a few common metrics to measure risk in unit trusts:

• Sharpe ratio: This measures the potential excess* return a fund generates for each unit of risk taken. A higher Sharpe ratio indicates a better risk-adjusted return.
• Sortino ratio: This is a variation of the Sharpe ratio that looks at the flip side of potential return, which is the downside risk. It is particularly useful for assessing a fund's resilience and stability during market downturns, making it suitable for analysing hedging strategies or low-volatility funds.

*In excess of a risk-free rate, usually using the yield on Treasury bills as a baseline.

Beyond assessing a fund’s risk-return profile in different market conditions, its positioning is also important. For this, we look at the fund’s alpha and beta:

• Alpha (α): This evaluates whether the fund manager has added value through stock selection or asset allocation. A positive alpha suggests that the actual return of the fund is higher than the expected return, which is usually tied to a benchmark. A negative alpha could be due to flawed strategies or high management fees eating into returns.
• Beta (β): This measures a fund's sensitivity to market fluctuations. A beta greater than 1 means the fund is more volatile than the market (magnifying returns in a bull market and losses in a bear market). A beta less than 1 suggests the fund is relatively stable and may be a suitable defensive component in a portfolio.

In short, the Sharpe and Sortino ratios tell us if a fund’s risk-taking is justified; the alpha assesses the fund manager’s value-add, and beta reveals the fund's sensitivity to the market.

2. Total Expense Ratio (TER)

A fund’s Total Expense Ratio (TER) is a metric for understanding its overall cost and what investors are paying to hold the fund. There are costs such as management fees, transaction fees, switching fees, and custody fees. 

Fees can compound and take a significant cut out of your investment returns, which is why it’s important to make sure you are aware of the fees involved before buying unit trusts, or any investment product, for the matter.

Consider the impact of fees with these two scenarios – both funds offer the same annual rate of return (before fees) of 7.0% on an initial investment of $100,000:

• Scenario 1: Fund A charges him a management fee of 1.0%. After 30 years, his portfolio is worth $574,349. He would have paid a total fee of $83,802.
• Scenario 2: Fund B charges him a management fee of 1.5%. After 30 years, his portfolio is worth $498,395. He would have paid a total fee of $114,642.

Just a mere 0.5% difference in fees would have cost the investor in Scenario 2 by about $30,000 more.

Endowus keeps fund-level fees low through access to institutional share class, which costs less than the retail share class. All trailer fees are rebated back to our clients in cash, ensuring more of your returns stay in your pocket.

Read more: A cheat sheet of unit trust fees

3. Maximum drawdown

The maximum drawdown is a fund's ultimate stress test, measuring its resilience in extreme market conditions. If a fund consistently falls more than its peers during market corrections and fails to keep pace during rebounds, this should ring alarm bells for you as an investor. This could indicate that the fund's risk management is weak or its asset allocation is too concentrated, making it vulnerable to market volatility.

When you evaluate a fund’s maximum drawdown, look not just at the percentage drop, but also the time it takes to recover to its previous peak. If other funds are recovering almost parallel to the markets, while this fund is struggling to do so, it may suggest that its asset selection or strategy is trailing behind market performance. In the long run, this hampers capital growth.

4. Portfolio concentration

As Nobel Prize laureate Harry Markowitz said, "Diversification is the only free lunch in investing". Diversification helps investors mitigate risks by spreading investments across different regions, industries, and asset classes – a key strength of unit trusts compared to single stocks. Like Tetris, the composition of the fund should meet the target allocation of your overall portfolio, with few overlaps with the rest of your investments. 

• Geographical, sector or asset class concentration: Even though unit trusts hold a basket of stocks, if, for example, all of them belong to the same sector, the fund remains exposed to that sector's cyclical risks. For instance, the tourism sector usually takes a hit in an economic downturn. Overconcentrating on this sector, even with diversification across different companies, could make a larger dent in your returns than a portfolio that is more diversified.
• Individual stock weighting: Following the same logic as above, over-concentration in one company means that a deterioration of financial health will disproportionately affect the fund's overall performance.

5. Fund manager experience and strategy 

When you invest in a unit trust, you are essentially entrusting the fund manager to protect and grow your money. The skill, track record, and discipline of the fund management team determine their ability to manoeuvre through tricky market terrains.

The stability of the management team should also be considered, including the tenure of key members, their performance with similar funds in the past, and whether the fund manager adheres to their investment philosophy during periods of market volatility.

Standing on the shoulders of giants to tap into their talent, systems and scale, Endowus partners with leading global fund managers, including Amundi, Blackrock, PIMCO, UOB Asset Management, and more.

6. Tracking error and information ratio

For passive or index funds, the main goal is to minimise the tracking error of a market benchmark, such as the S&P 500 or MSCI China Index. For active funds, the objective is to generate excess returns through stock selection, aiming to outperform the benchmark. Here is how to use tracking error and the information ratio to evaluate a fund:

• Tracking error: This measures the degree to which a fund's returns deviate from its benchmark's returns. A lower error indicates a stronger ability to replicate the index. For instance, the Amundi Index MSCI World Index has a realised tracking error of 0.31% in the past three years through May 2025, meaning it almost perfectly mirrors the index. In contrast, some emerging market ETFs might have errors as high as 5% due to factors like foreign exchange controls or liquidity constraints.
• Information ratio: Calculated by dividing a fund’s excess return by its tracking error, this ratio measures the consistency of a fund's performance relative to its benchmark. If a fund consistently outperforms its benchmark by 2% each month, its performance is steady with a low tracking error. However, if another fund beats the benchmark by 10% one month but underperforms by 6% the next, its tracking error would be higher, indicating greater volatility, even if the average excess return is the same.

Generally, a higher information ratio indicates that the fund manager's strategy for stock selection or asset allocation is more consistent and stable, as it not only generates excess returns but also controls volatility.

Build a robust investment portfolio with best-in-class unit trusts

When choosing which unit trusts to buy, ensure that each of them has a meaningful role to play within your investment portfolio – like a soccer team. Think of high-return assets as your strikers, risk-control assets as your defenders, and the fund manager as the coach who sets the strategy and makes tactical adjustments.

The Endowus Investment Office implements a strict screening process called SMART+ to select unit trusts by fund managers with robust investment strategies and track records, allowing our clients to choose only from a curated list of best-in-class funds. Explore them on our fund platform, Fund Smart.