What is a Unit Trust?
Unit Trust is a financial vehicle that allows general public to pool their money in a ‘ Trust ‘ fund managed by professional Fund Managers who then invest the funds in a diversity of equities, bonds and other authorised investments.
What does buying a ‘unit’ means?
Investing in unit trusts means buying the ‘ units ‘ of the trust fund. When you own even just one unit of a trust fund, you become one of the collective owners of the investments made by the Fund Managers.
Is it safe to invest in a unit trust?
Yes. ‘The Capital Markets and Services Act 2007’ regulates all matters relating to unit trust funds, whilst the ‘Guidelines on Unit Trust Funds’ governs the operations and the administration of unit trust funds. The Guidelines also provides a regulatory environment to protect the interests of the investing public and facilitate the orderly development of the unit trust industry.
So, when you invest in a unit trust, you can be sure that your money is safe from theft. The Securities Commission reads and approved each unit trust’s prospectus and annual report, periodically audits unit trusts’ financial records, and generally makes sure everything with the fund is in order.
To safeguard your investment, a Trustee is appointed for the fund. The Trustee shall take custody and control of the assets of the fund and ensure that the fund manager adheres to the requirements as set out in the trust deed.
What is a Deed?
A Deed is a set of rules on how the trust is operated, thus, it shows the rights and obligations of the Manager, the rights and duties of the Trustee and the rights of the unit holders.
Why should I invest in unit trusts?
Finding the right stocks to invest takes patience, resources and expertise. The number of listed companies run into hundreds so it is practically impossible for most investors to find the time adequately to make research. By investing through a unit trust, you can enjoy the benefits of having experts working on your behalf. Transaction costs are also reduced through bulk dealing.
Finally, unit trusts are liquid because units can be bought or sold on any working day without any lock-in period. In short, the benefits of investing in unit trusts are Diversification, Professional Management, Liquidity and Ease of Transaction.
What are the pros and cons in each type of investment/savings vehicles?
If you are just trading stocks, why can’t I do it myself?
You can do it all by yourself if you have enough knowledge to analyse the market, sufficient time to monitor your investment and to do the administrative work and also a huge sum of money to diversify your investment into various sectors. Of course, to be more secure it requires expert knowledge and indeed, frequent company visits. But if you invest with us, the above mentioned tasks will be our Fund Manager’s responsibility.
Stock markets are not performing, why should I buy now?
We believe superior long term investment performance can be achieved by exploiting inefficiencies in capital markets through vigorous and intensive research within a disciplined investment process. Even if stock markets are not performing, the depressed market presents an opportunity to buy these companies at relatively bargain price.
You should understand that the fund manager is the one who needs to worry about tracking economic, political stability and uncertainty. Besides, when considering investing in a unit trust, anytime is a good time to invest, as a regular savings plan is essential to reduce the effect of market fluctuations on the average investment cost (dollar cost averaging principle).
What is Dollar-Cost Averaging?
It is a systematic and regular investment of a fixed amount of money irrespective of the price level no matter the market is rising, declining or fluctuating. This approach works on the averaging cost principle of investments; investor will get more units when prices are down and fewer units when prices are up. This method however does not assure profit nor to protect you against loss. Please refer to the illustrated example:
As seen from the illustration above, you can actually capture higher returns if you keep making the contribution at a regular interval no matter at what the price level is. It is essential in unit trust to adopt a discipline saving plan over a long-term period, so that you do not have to worry much on the market volatility.
What if I prefer to manage my own money?
It is fine to manage some of your money but it is also a good idea to put some money into unit trusts for diversification purposes. Your ideal portfolio should consist of equities, fixed income securities, insurance and unit trusts in appropriate weightings to suit your risk appetite.
What if I prefer to put my money into fixed deposit, which is at no risk?
Historically, investment in unit trusts has outperformed fixed deposits over the long term. The interest earned from fixed deposits usually is lower that it can erode capital and depreciate the purchasing power of money in longer term as the interest may not be enough to cover the tax and inflation. Though unit trust investment carries with it a higher risk, the potential for reward should be more than to compensate for it. Of course you should not forget about putting aside some money in fixed deposits for emergencies
Do I need a lot of money to invest?
Investing in unit trust funds is generally affordable for most people. For example, an initial investment for our Phillip Master First Ethical Fund starts from RM 500 and its subsequent investment is only from RM 100. You may refer to our Master Prospectus to find out more on the initial and subsequent investment for other funds available.
What rate of return can I expect?
The rate of returns depends on the fund’s performance. If the fund makes little or no profit, it may not pay out any distribution. Your unit trust investment return refers to both income and capital growth where:
Income return arises from dividends earned on shares and capital gains realized on the sale of shares.
The distributions (if any) will be declared at the end of each financial year and will be distributed to investors based on the total units held at the end of the fund’s financial year. The distributions will be paid to investors by cheque or reinvested on the investors’ behalf as per the distribution policy in the prospectus.
Capital growth arises from an increase in the value of the shares in the portfolio. Investors who sold the units at a higher price than the amount purchased will realise a profit and similarly investors will experience a loss if the portion of the investment sold is less than the purchase price.
Please note that past performance, past earnings or distribution record of the Fund are neither a guarantee nor an indication of the Fund’s future performance, earnings or distributions.
What should I consider before investing in a unit trust?
You should always consider four factors i.e. your investment objectives, risk profile, investment time horizon and your affordability at any one time.
Why some of the funds do not declare distribution?
Different funds place different emphasis on the investment returns. Growth funds for instance, place more emphasis on capital gain while income funds emphasis on distribution. Fund Managers of growth fund would closely observe the objective of the fund and invest monies into selective stocks, which are geared on a long-term growth.
Why there is often little or no price appreciation on unit trust prices compared to its initial offer price even after a substantial period?
Unit trust management companies tend to make cash distributions or issue unit split which cause the per unit price to readjust downward. This is usually done to keep the price of each unit from looking too expensive and thus putting off new investors.
What are unit splits and how do they benefit investors?
Unit split represents the process of creating additional units to existing unit holders by lowering unit prices proportionately. Like bonus issue of normal stocks, it offers no additional value to investors. However, it does, illogically, make most unitholders feel warm, fuzzy and decidedly happy.
Why do unit trust prices drop after a cash distribution?
Income earned by a fund during the financial year is accrued in its unit’s price until the end of the distribution period. Upon declaration of an income distribution, any interest income and realised capital profits are paid to unitholders. Consequently, the Fund’s NAV, and therefore the offer and bid prices, will tend to fall by approximately the same amount as the income distribution.
Is income received by unit trust funds taxable?
Dividend income received by the fund is subject to tax, but interest income and capital gains, in general, are tax-exempted.
Will the fees and charges affect funds’ performance?
Fees and charges vary from fund to fund. Management companies are allowed to charge three types of fees i.e. Initial Service Charge, Repurchase Fee and Management Fee. In addition, certain other expenses such as trustee fees and brokerage expenses are borne by the fund. Usually the two most important fees to be considered are the Initial Service Charge and the Annual Management Fee.
For both, all else is being equal, the lower the better. But again, remember to compare apples with apples. Typically bond funds have lower costs than equity funds yet they also usually deliver, over the long term, less spectacular results. You should also consider the Management Expense Ratio (MER) of a fund. MER is the ratio of the total annual management expenses of the fund to the average value of the Fund.
It is the best indicators on the cost of investing in a fund and allows investors to compare the cost effectiveness of the other funds within its categories. The lower the MER, the more cost effect the fund is.
How is the performance of a unit trust fund evaluated?
You should evaluate how a fund performs by looking at Fund Performance Tables provides by independent rating companies such as Lipper Fund Table or Standard & Poor’s Fund Services Fund Table. Performance of the funds are evaluated based on the prices movement plus the changes brought about by cash distributions and unit splits within a stipulated time frame with the assumption that all distributions are reinvested.
When doing so, you must make sure that you are comparing apples with apples and not apples with durians. Make sure your comparisons are within the same category or sector. Since unit trusts are medium-to-long-term investment instruments, pay more attention to 3-or 5-year performance and compare it to an appropriate benchmark (example: for equity funds – KLCI; for bond funds – the average Malaysian FD rate for the period under consideration) and its peer group performance. You should also look at the consistency performance of a fund
Should I invest in unit trust funds that are ranked at the top of the Performance Tables?
Buying a fund that ranked top over a given period shall not be used as a sole criterion to invest in any fund. It is not necessarily the case that this fund will continue to be the best in future. For international standard, fund with 3 to 5 years track records can only be used to gauge the consistency of the performance of the fund.
What is the main difference between unit trusts and unit-linked funds?
‘Unit Trusts’ are pure investment vehicles run by unit trust management companies whereby ‘Unit-Linked Funds’ are packaged products that combine unit trust investment with insurance protection. Selected insurance companies offer these hybrid products.
There are many unit trust companies in Malaysia, which one should I choose to manage my money?
Presently, there are more than 40 unit trust management companies established in Malaysia. Apart from the fund performance and the fund manager’s credibility, you should also look into the reputation and management style of a unit trust management company before making your investment choice.
Why have unit trusts grown so dramatically in terms of numbers and scope in the global market?
Investors are becoming more sophisticated and they recognise their need to diversify their asset allocation strategy to achieve their specific financial goals. Unit trust is one of the effective tools to achieve those needs. In US and UK, there is dramatic growth of unit trust capitalization due to these countries do not have an Employee Provident Fund such in Malaysia, thus their employees have to invest in unit trusts to provide for their retirement and to satisfy other financial needs.
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