Investing in Unit Trusts
Do’s
- Do examine the risk profile of the fund before making an investment decision.
- Do identify your investment goals and risk profile and select the types of funds that are suitable for you. Generally the higher the returns, the higher the risks will be which is generally referred to the extent to which your investment may fluctuate in price or value.
- Do note that the price of units can goup and down, distribution is not guaranteed and you may realise a gain or loss when you sell your units.
- Do read the prospectus carefully. Make sure you understand the investment objectives of the fund and the risks associated with it.
- Do request for
the latest annual or interim unitholders’ report. Read these documents
carefully and look out for :-
Information on the shareholders, board of directors and management company. Access their financial strength, track record, experience of the company and its staff.
The fund investment portfolio and commentary on its performance. Any specific features and constraints which may conflict with your needs and preferences.
- Do know all fees and charges that you have to incur on your investments and what those fees and charges are for.
- Do request for some authorisation document or card of the salesperson to confirm that he or she is a bona fide authorised salesperson.
- Do keep good records of your investments and check any statements or certificates you receive to make sure they are correct.
- Do understand what a hybrid product is and seek clarification from the bank prior to investing. Example of hybrid products are fixed deposits offering high interest rates provided you invest a similar portion of your funds in unit trust. Normally the banks will provide 1% to 2% of the unit trust investment amount in the form of a gift which can take the form of cash rebate, bonus units or higher fixed deposit rates. If the gift is in the form of higher fixed deposit rates, the rates can appear very high when it is annualised. For example when 1% is annualised it will depict a rate of 12% per annum. If the rebate is 2% of the unit trust amount , then the fixed deposit interest rate will be 24% per annum. Take note that the unit trust portion is still subject to monetary loss / gain and that there are administrative charges involved in investing in unit trust.
- Do seek clarification and confirmation when in doubt.
Don’ts
- Don’t invest in unit trusts for quick gains. Unit trust should be rated as a medium to long term investment rather than as speculative instruments.
- Don’t rush into a decision. Unit trusts are not only sold during the initial offer period but throughout the life of the fund, as long as the units in circulation do not exceed the approval limit.
- Don’t use a fund’s track record strictly to invest. Use it only as a guide as the performance of the fund is not guaranteed.
- Don’t rely on oral presentation from a salesperson that is not contained in the prospectus, application form or other official document issued by the management company of the fund.
- Don’t give cash to a salesperson or make out a cheque in his or her name. Payment should only be made to the management company.
- Don’t be pressured to purchase a product that is inconsistent with your investment goals and the risks you can afford to.
- Don’t rush or be pressured to buy before an impending distribution payment or issuance of bonus units by the fund because unit prices will fall and your investment value remains unchanged.
- Don’t use borrowed funds for your purchases of unit trust without understanding the cost of borrowing.
| Frequently Asked Questions |
- What is a unit trust ?
- Why invest in unit trusts?
- Is it safe to invest in unit trusts?
- What are the legislations governing the unit trust industry?
- What type of investor would be attracted to invest in unit trusts ?
- What is a “Prospectus”?
- What are the fees and charges imposed by the management company?
- How is a unit priced?
- What are my returns from investing in unit trusts?
- What are the important factors that I should consider when selecting a fund?
- What are the different types of unit trust available in the market?
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Unit trust is an investment scheme that pools money from many investors who share the same financial objectives. The fund is then managed by a group of professional managers who will invest the pooled money in a portfolio of securities such as shares, bonds and money market instruments to achieve the objectives of the funds.
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Unit trusts offer investors a simpler, more convenient, and less time-consuming method of investing on securities than trading individually. An important benefit is diversification wherein investors in unit trusts can usually access a broader range of securities than they could investing on their own. Such a diversified portfolio reduces risk should some investment drop in value and at the same time increases the chance of picking up good stocks. Investors also benefit from full-time professional management of their investments. In addition, the investment is liquid as investors can sell some or all of their investments at any time.
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3.Is it safe to invest in unit trusts?
All investments carry some form of risk. However, a good Fund Manager would be able to minimise them with sound investment techniques.
Under the unit trust regulations, all assets and the Fund are in the hands of the trustee. The trustee ensure that the Fund Manager manages the fund in accordance with the terms of the Deed. In addition, the Securities Commission closely supervises it..
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4.What are the legislations governing the unit trust industry?
- Securities Commission Act 1993
- Guideline on Unit Trust Funds
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5.What type of investor would be attracted to invest in unit trusts ?
Unit trusts are tailored to meet the needs of :
- Investors seeking investments with capacity to outperform inflation and fixed interest savings over the long term by consistent income and capital growth.
- Parents seeking savings plan for children’s education.
- Self-employed or employed persons seeking assurance of financial self-dependence on retirement.
- Pensioners seeking savings alternative to long term fixed interest investments.
- Institutions with excess fund seeking expertise to invest.
- Foreigners seeking investments in Malaysia.
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It is an official circular that describes the unit trust scheme and the management company. The purpose of a Prospectus is to assist the Unitholder in making an “informed” decision by providing full disclosure of relevant facts and information pertaining to the scheme and its investment.
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7. What are the fees and charges imposed by the management company?
Fees and charges can vary from fund to fund. Management companies are allowed to charge three types of fees:-
- Initial service charge - this is usually built into the fund’s selling price;
- Repurchase fee - this may be included in the fund’s buying price; and
- Management fee - this represents the management company’s fee for administering the fund and is directly charged to the fund.
In addition, certain other expenses such as trustee fees and brokerage expenses are also borne by the fund. You may refer to the prospectus for more information on fees and charges.
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To invest in a fund, you buy units through the management company at the prevailing selling price which is calculated daily and usually quoted in the major newspapers. The selling price is inclusive of the service charge imposed by the management company.
You can also sell your units back to the management company at the prevailing buying price at any time. The buying price is always lower than the selling price as it is the actual investment value of the unit less the service charge as mentioned above.
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9.What are my returns from investing in unit trusts?
A unit trust has the potential to earn money for unitholders via growth and distribution income. Growth or capital appreciation occur if the value of the fund increases. Thus if you sell the units at a higher price than you paid for them, you realise a profit. On the other hand, if the value of the portfolio falls, the value of each unit falls too.
Whatever income that is received by the fund may be passed on to unitholders as distribution. If the fund makes little or no profit, it may not pay any distribution. Thus, distribution is not guaranteed.
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10. What are the important factors that I should consider when selecting a fund?
As an investor, you should consider the following factors:
- Investment objectives or goals
- Investment policies
- Size of fund and growth trends
- Any investment restrictions
- Potential risks
- Types and amount of fees
- Historical performance, particularly the distribution of income to investors and growth of assets.
- Latest investment portfolio
- Information on Board of Director, key management team, auditor and trustee.
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11. What are the different types of unit trust available in the market?
Income funds : Invest in fixed income securities and huge distribution yielding shares with a view of paying out most of the returns. Suitable for investors seeking income and some level of growth at low risks.
Capital growth funds : Invest primarily in shares with a view to maximizing capital growth over the long term (i.e. through a higher unit price). Appeal to high risk investors keen on capital accumulation.
Aggressive growth funds : Similar to capital growth funds but investment in aggressive shares that promise high returns - with higher risk. Generally suitable for high risk investors.
Balanced funds : Tries to achieve three objectives : income, moderate capital appreciation and capital preservation. Invest across a broad spread of assets categories including shares, fixed income securities and cash. Well-diversified and suitable for investors looking for reasonable save investment where risk is lower and produce average returns.
Index funds : Invest in a basket of shares that tracks a selected stock market index.
Bond funds : Invest only in fixed income securities such as bonds and short term money-market instruments. All bonds are subject to interest rate risk and most to credit or default risk of the issuers.
Money market funds : Invest only in short term money market instruments such as treasury bills, negotiable certificate of deposits and bankers acceptances, with maturity of less than 90 days. Since the funds invest in money market instruments, the returns are generally more attractive compared to saving deposits.
Islamic funds : Managed according to syariah principles; invest in shares and fixed income securities excluding “non-halal” shares and interest bearing money market instruments.
State funds : Managed by the state development corporations for investors from the respective states.
It is important that you choose the appropriate funds based on your risk profile and investment objectives.
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