Unit Trusts 101

Introduction
All of us have dreams. Dreams of a better life, a good education, material wealth ~ things we believe will make us happier and more fulfilled. Dreams need not be just wishful thinking. For they can also be achievable, if you have the right investments working for you.

For medium- to long-term goals, unit trusts are a viable investment option as they utilise time and the power of compounding interest to your advantage. The earlier you start, the better your chances of reaping potentially high rewards.

Unit Trusts are a form of collective investment that allows investors with similar investment objectives to pool their funds to be invested in a portfolio of securities or other assets.

A professional fund manager then invests the pooled funds in a portfolio which may include the asset classes listed below:
1) Cash
2) Bonds & Deposits
3) Shares
4) Property
5) Commodities

Unit holders do not purchase the securities in the portfolio directly. Ownership of the fund is divided into units of entitlement. As the fund increases or decreases in value, the value of each unit increases or decreases accordingly.

Each investor of the fund receives a certificate of entitlement, known as a unit trust certificate. The number of units held depends on the unit purchase price at the time of investment and the amount of money invested.

Today, most companies have gone scriptless. Investors, however, can request a certificate for a fee.

The return on investment of unit holders is usually in the form of income distribution and capital appreciation, derived from the pool of assets supporting the unit trust fund. Each unit earns an equal return, determined by the level of distribution and/or capital appreciation in any one period.

Unit trust investors are typically those with small amounts to invest, who neither have the time nor the inclination to hold portfolios of direct investments or shares. Rather, they prefer to invest in a secure, reputable investment vehicle that suits their purposes. Unit trusts allow investors to have easy access to a wide range of investment exposures not normally available to them.

As investors seek to maximise returns on their financial resources, unit trusts provide an ideal way for them to gain exposure to investments that, in the long run, should produce returns superior to cash savings and fixed deposit investments.

The cost of these potentially higher returns is of course the risk that accompanies the investment. In the short run, the certainty of investment returns of most unit trust products is less than those offered by fixed deposits. However, in the medium to long term (i.e. 3-20 years), unit trust investments generally provide superior returns at acceptable levels of risk.

This is because unit trusts take the middle ground between high-risk/high-return investment vehicles such as the stock market, and low-risk/low-return vehicles such as fixed deposits. As such, many people find unit trusts a very palatable way to invest.

There's a reduction in risk because the portfolio is spread over several types of investment categories, such as equities, bonds, andthe money market. And it's managed by professional fund managers, most of whom possess the Chartered Financial Analyst (CFA) qualification.

Unit trusts can also be bought and sold within one working day so there's little risk of your money being tied down.

Benefits of Unit Trusts
For an individual to maintain his own portfolio of investments, he needs to keep up to date with market information and sentiment. In today's sophisticated financial markets, this means having to embrace a wide range of information from a plethora of sources. For many individual investors, this is difficult, if not impossible and at times, very frustrating as they attempt to "keep on top" of the information pile.

Investing in unit trusts transfers most of the necessary 'know-how' of investing to those best equipped to handle it - the professional fund managers.

There are a number of other substantial benefits of investing in unit trusts that should be noted:

Diversification
A larger pool of funds allows the fund manager managing the unit trust to purchase a wider range of investments. Rather than concentrating an investment portfolio into one or two investments or shares, a portfolio of market securities can be held. The wider the spread of investments, the less volatile (i.e. variable) the investment returns will be. In simple terms, investment into unit trusts means diversification of risk: "not putting all your eggs in one basket."

Liquidity
Most investors require that their investment be liquid. That is, they can easily buy and sell within a short period of time. Unit trusts provide this benefit, being bought and sold easily. An excellent return that cannot be "cashed-in" (i.e. sold) does not necessarily mean a good investment as poor liquidity constitutes an additional risk factor for the investor.

Professional Fund Management
The people making investment decisions for unit trust holders are professionals. Their training and background ensures that decision-making is structured and according to basic investment principles. In the process, unit trust funds enjoy the depth of knowledge and experience that fund managers bring. In the long term, it is this expertise that should generate above average investment returns for unit trust investors.

Investment Exposure
For the individual investor, it is sometimes difficult to gain exposure to a particular asset class. For instance, if an investor with RM5,000 wanted to gain exposure to the Malaysian property market, global equity markets and the Malaysian bond market, it would be impossible to simultaneously hold a direct investment portfolio in all of these markets. With unit trust investments, it is possible to spread your money around to all of these asset classes at the same time, so that the investor can gain the investment exposure he requires.

Wholesale Investment Costs & Access to Investments
When making small investments, the investor faces costs and charges that are much higher. Unit trust funds are investing with large amounts, so that the economics of the transaction are more favorable i.e. the fees and charges/brokerage, and etc. per investment ringgit are likely to be less.

Also, because fund managers invest in larger amounts, they are able to get access to wholesale yields and products that are impossible for the individual investor to obtain. For instance, unlike unit trust funds, most individual investors cannot directly access the Malaysian Government Security market because, amongst other reasons, the amount of each transaction could run into millions of Ringgit.

The Comfort of Regulation
With the introduction of unit trusts in Malaysia came regulation from various regulators, especially the Securities Commission. The entire range of variables relating to the unit trust industry is governed by various legislation.

The sole purpose of such regulations is to protect the interest of the investing public. Without the safeguards imposed by regulations, investors can be exposed to the acts of unscrupulous people who raise funds from the public, never to be seen and heard again.

Regulations provide investors with a level of comfort that they are investing in a safe investment mechanism.

Having said that, you should take charge and have the final say when it comes to your investments. You should know what your options are, based on your risk tolerance, so that you can make informed decisions. And realise that those decisions lie entirely in your hands.

Risk Tolerance
Investing towards a financially secure future is important, but it's equally important to feel comfortable with the investments you make. That's why you need to assess your risk tolerance. This helps to define the kind of investor you are, which then helps to narrow down the unit trusts that are most suited to you. The result is a more customised and focused investment plan.

Click here to visit a Risk Profiler and determine your risk tolerance level.

Click here to visit another Risk Profiler and determine your risk tolerance level.

Guidelines and Code of Ethics
Registration as a Person Dealing in Unit Trusts (PDUT) also known as a Unit Trust Consultant (UTC) requires compliance with all clauses under the Minimum Standards for Registration of PDUT, as stipulated in the Guidelines on Marketing and Distribution of Unit Trusts issued by the Securities Commission, including the requirement to pass the Unit Trust Examination prior to registration.

The registered PDUT must comply with all the provisions of the Code of Ethics and Standards of Professional Conduct for The Unit Trust Industry at all times.

Disclaimer
Investments in unit trusts are not obligations of, deposits in, guaranteed or insured by the fund manager. All applications for units in the funds must be made on the application forms accompanying the prospectus. Investors should read the prospectus for details. The value of the units and the income from them may fall as well as rise. Any forecast made is not necessarily indicative of any future or likely performance of the funds. Your Unit Trust Consultant may receive a commission from the fund managers in respect of their transactions and have no obligation to account to you for all or any part of such commission. Information on unit trusts provided in this article (including, without limitation, information in the fund fact sheets) is furnished by the relevant fund houses. You should, therefore, check with them before relying on such information. This article is for education purposes only and does not constitute investment advice. Copyright 2003-2004 Azlan Adnan Legal Notice