Introduction to Unit Trust
A unit trust is a form of collective investment that pools investors’ money into a Fund. These funds will be invested by professional fund managers in a portfolio of securities according to the fund’s objective and investment strategy. Portfolio may include asset classes such as bonds, property, commodities, cash or other asset classes chosen by the fund manager.
As the value of the fund increase or decrease the value of each unit increases or decreases accordingly. The number of units held depends on the amount of money invested as well as the unit price at the time of investment.
Hence, any gains will be distributed among all the investors according to your investment amount. This is known as income distribution, which can be made up of shares, capital gains, dividends and profit depending on your fund type.
Parties Involved in a Unit Trust
The parties involved in a unit trust fund are the manager, the trustee and the unitholders. The Manager is responsible for the management and operations of the unit trust fund while the Trustee holds all the assets of the unit trust fund. The obligations and rights of each of the three parties are specified in the Deed, (a legal document entered into between the manager and the trustee, and registered with the Securities Commission). The Deed regulates the duties and responsibilities of the manager and the trustee with regard to the operations of the trust fund and protects the Unitholders’ interests.
The main advantages of investment into a Unit Trust fund is the reduction in investment risk by way of diversification as well as having approved professional investment managers manage the funds. Unit trust investments generally tend to invest in a range of individual securities.
As Unit trusts is a collective investment scheme, the investors can start with a minimum investment amount.
Unit trust are invested in a wide range of assets, this reduces the overall risk of the portfolio. This means that the poor performance of any one asset in the fund is not likely to have a major adverse impact on the portfolio as a whole. In addition, investing into a diversified portfolio of investments, rather than put all your investment in one basket.
Unit trusts provide investors with a simpler, more convenient and less time-consuming method of investing in securities. That is, the investment can easily be converted back to cash. Unit trusts provide this feature as units can easily be bought or sold. Some funds can even return your investment to cash within the same day. It is also easy for investors to switch between funds.
Professional Fund Management
Unit trusts fund managers are approved professionals in a highly regulated industry. Their license, background and expertise ensure that decision making is structured and according to sound investment principles. In the process, unit trust funds enjoy the depth of knowledge and experience that fund manager can bring. In the long term, it is this expertise that should generate above average investment returns for unit trust investors.
For an individual investor, it may be difficult to have exposure to particular asset classes. For example, if an investor with RM20,000 wants to be invested into property, global equity and bond market, it would be impossible to simultaneously hold a direct investment portfolio in all of these markets. However, with unit trust investments, it is possible to spread the RM20,000 around to all of the asset classes concurrently so that the investor can gain the investment exposure he seeks.
Understand different types of funds
There are different types of unit trust funds that you can invest in. Not all unit trusts are created the same, there are funds created with different assets. Therefore, its best you understand the common types of unit trust funds available and how they complement your financial goals to know which Fund to put your money in.
The common types of unit trusts funds are as follow:
This is a fund made up of stocks listed by companies on the stock market (Bursa Malaysia). Thus, the performance/price will also depend on the movements of the stock market.
This is a mix of low-risk and high-risk funds, which include money market funds, fixed income and equity. This is best for investors who intend to invest in specific sectors or regions.
Bond/Fixed Income Fund
This consist of investments in fixed income securities such as corporate or government bonds. A bond refers to a debt investment where an investor loans money to a company or the government.
This comprises of funds that are invested in domestic cash and cash equivalents. These investments are relatively low risk and highly liquid as the assets can easily be converted to cash. Such investments can include short-term money bonds.
Real Estate Investment Trusts (REITS)
REITs invest in real properties, usually prominent commercial properties and provide the investor with an opportunity to participate in the property market in a way which is normally impossible to the small time investor. By investing into REITS, however, it is possible to invest a small amount to gain exposure to the property market and have diversification in your portfolio.
The objective of Shariah funds is to invest into Shariah compliant investments which for example exclude companies involved in activities, products or services related to conventional banking, insurance and financial services, gambling, alcoholic beverages and non-halal food products.
Ways to Invest in Unit Trust Fund
There are 3 ways to invest in unit trusts funds, through EPF Investment, Cash Investment and Regular Savings
EPF Members Investment Scheme
Investors may also invest into unit trust funds from their EPF Account 1 if he or she is eligible. EPF members can refer to their EPF statement as well as the Basic Savings Table to check their eligibility and quantum of investment allowed.
Cash or Lump Sum Investments
Investor can use their lump sum amount to invest into a unit trust fund. Over a period of time, the initial investment will increase as income is earned by the fund. When investor redeems his or her units, the unit redemption price will reflect the accumulation and compounding of the invested capital over the relevant periods. It is this compounding effect over time which makes investment into unit trust funds attractive.
Regular or monthly contribution plan allows investors to invest a set amount into the unit trust of their choice. This is a convenient way of saving on a monthly basis with fluctuations in the unit price. By making equal and regular contributions over a period of time, the sum accumulated at the end of the period will increase. This is commonly known as dollar cost averaging. The regular savings can enhance the returns from the unit trusts that perform reasonably well over a long period.
This is the risk when the value/ demand of a stock/Shariah-compliant stock/share/Shariah-compliant share, bonds/ sukuk or any other security may be reduced due to market activity. The volatility of the market activity can be caused by factors such as inflation, changes in government policies, interest rates and exchange rates, therefore, as market conditions change, the performance of units may fall as well as rise, and income produced by a fund may also fluctuate. Accordingly, the Manager cannot guarantee any distribution or investment returns to the Unit Holders. However, by investment in a wide range of securities/Shariah-compliant securities, the Manager attempts to balance this risk with the investment rewards that can be made.
Particular Stock Risk
Any irregular fluctuation of a particular stock/Shariah-compliant stock may affect the unit price as the price of units may also fluctuate. This impact is reduced if a fund invests in a wide portfolio of investments.
The prices of securities/Shariah-compliant securities may also be affected by the political and economic conditions of the country in which the securities/Shariah-compliant securities are issued. However, investment can diversify across markets/countries which will assist in mitigating the risk that may arise.
This risk is associated with investments denominated in foreign currencies. The net asset value of a unit trust fund will be lower if the foreign currency in which the securities/Shariah-compliant securities are denominated moves unfavourably against RM. The management company can hedge the currency in mitigation adverse currency movements.
Loan/ Financing Risk
If you obtain a loan/ financing to finance your purchase of units, you need to understand that: (a) Borrowing/ financing increases the possibility for gains as well as losses; and (b) If the value of your investment falls below a certain level, you may be asked by the financial institution to top up the collateral or reduce the outstanding loan/ financing amount to the required level. Investors are encouraged to invest money from their savings rather than borrowing money/ seek financing from the financial institutions. Islamic funds’ investors are encouraged to seek Islamic financing to purchase the units.
Interest Rate Risk
This risk refers to the effect of interest rate changes on the market value of a bond portfolio and the valuation for a sukuk portfolio. In the event of rising interest rates, prices of Fixed Income Securities/ valuation for sukuk will decrease and vice versa, which will then have an impact on the net asset value or unit prices of the fund. Meanwhile, debt securities/ sukuk with longer maturity and lower coupon/ profit rate are more sensitive to interest rate changes. This will be mitigated via the management of the duration structure of the fixed income/ sukuk portfolio. As for Islamic fund, the interest rate is a general economic indicator that will have an impact on the management of fund regardless of whether it is an Islamic fund or otherwise. It does not in any way suggest that the fund will invest in conventional financial instruments. All the investments carried out for Islamic fund are in accordance with requirements of the Shariah.
Credit/ Default Risk
This risk refers to the possibility that the issuer or financial institution of a securities/Shariah-compliant securities, instruments/Shariah compliant instruments or deposit/Islamic deposits placements will not be able to make timely payments of interest/ profit or principal repayment/ payment on the maturity date. This may lead to a default in the payment of principal and interest/ profit and ultimately a 80 reduction in the value of unit trust funds. This risk is managed by the internal policy of setting a ceiling or limit to the exposure and also the constant process of credit evaluation to mitigate such risk to an acceptable level.
There is a risk that the management company may not adhere to the investment mandate of the fund, the deed and prospectus of the fund, the Guidelines, the internal policies and the relevant laws. As a result, the fund may not be able to achieve its investment objectives. The aforesaid may result in the management company being penalised by the relevant authority, for example, a suspension of the management company’s license. In order to mitigate this risk, the management company must have stringent internal controls and ensures that compliance monitoring processes are undertaken.
Any large fluctuations in the prices of Fixed Income Securities/Islamic fixed income securities of any of the companies that the fund owns may cause the net asset value or prices of units to change too. Such fluctuations can be caused by changes in government laws in the industry in which the company belongs, entry of new competitors or changes in business directions / strategies / operations. It must be noted that it is not possible to anticipate such risk all the time.
Management Company Risk
There is a risk that the management company may not adhere to the investment mandate of the fund. With close monitoring by the investment committee, back office system being incorporated with limits and controls, and regular reporting to the senior management team, the management company is able to mitigate such risk. The trustee will also have an oversight on the management company pursuant to the Guidelines. Poor management of the fund may also jeopardise the investment of unit holders through the loss of their capital invested in the fund.
Purchasing power is reduced by inflation and if the rate of inflation is constantly higher than the rate of returns on investments, the real rate of your investment return (i.e. the returns after adjusting for inflation) could be negative despite the fund showing a positive return. Hence, investors should consider the potential real rate of returns prior to investing.
Liquidity refers to the ease of liquidating an investment of a security/Shariah-compliant security at or near its fair value depending on the investment’s volume traded in the market. A unit trust fund holding many securities/Shariah-compliant securities that are illiquid, or difficult to dispose of, will have its value depressed when it has to sell these securities/Shariah-compliant securities at a discount to their fair value. This risk is mitigated through a systematic security selection process and portfolio diversification.
The performance of a unit trust fund’s investment depends upon the proper functioning of both internal and external systems and processes. A market disruption event or system interruption can also impact processes when there is an interruption in the flow of information needed for making qualified decisions in managing the unit trust fund. These disruptions may impact the performance of the unit trust fund, the settlement of trades in the unit trust fund and may also affect the investor’s transactions with the unit trust fund. The Manager has to put in place internal controls to manage some of these disruptions such as business continuity plans. However, investors should note that not all circumstances can be prepared for nor anticipated. In such circumstances, the Manager will take appropriate measures to safeguard the Unit Holders’ interests.
Possibility of Loss
The prices of units in a unit trust fund and the income from the fund may go down as well as up due to price fluctuations of the securities/Shariah-compliant securities that the fund invests in. A possible loss of all or part of the principal invested cannot be ruled out. No guarantee is given, express or implied, that investors will receive any income distribution or returns on their investments, or that investors will get back their initial amount invested in full. The Manager endeavours to mitigate this risk by employing a systemic investment process that is incorporated with a risk management process.
Investment Manager Risk
The performance of any unit trust fund depends on the experience, knowledge and expertise of the investment manager. The risk of the fund underperforming the benchmark may be a result of wrong forecasts or human negligence. Any error in the investment techniques and processes adopted by the manager may have an adverse impact on the fund’s performance. The investment manager seeks to mitigate this risk by implementing a structured investment process based on the investment policy and strategy of the unit trust fund and systematic operational procedures along with stringent internal controls.
The sales charge is a fee levied on the purchase of units of a Fund, and is used to pay for marketing, advertising and distribution expenses of a Fund. The sales charge is deducted upfront from the purchase amount, leaving only the net amount invested in a Fund.
Annual Management Fee
Management fee is a periodic payment that is paid by an investment fund to the fund’s investment adviser for investment and portfolio management services. Annual management expenses include expense for portfolio management, trustee and custody fees, audit fees, administrative costs and other services properly incurred in the administration of the fund.
Referred to as the repurchase charge or redemption charge. This fee represents a deduction by the fund house from the proceeds of disposal of an investor.
The annual trustee fee is a fee paid to the Trustee for the custodial management and administration of a Fund’s assets such as transaction settlement, custody and administration costs amongst others.