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Here’s How To Evaluate Your Unit Trust Fund’s Performance

This article is sponsored by Securities Commission Malaysia, under its InvestSmart initiative

Hold or sell? Buy or wait? These are important investment decisions for every investor.

However, one thing is certain – investors should not base their decisions on emotions, or worse, rumours, but on the fund’s performance over time. Therefore, the funds must be regularly evaluated.

Unit trust investments, like any other investment, do not guarantee returns. This means that your principal value can fluctuate according to changes in the market. As such, it is imperative that you examine the performance of your funds regularly.

Fund evaluation is a good barometer of a fund’s performance over the years and how well it is managed. It allows you to chart the progress of your funds, and should be done regularly.

Here are three ways you can evaluate the performance of your unit trust funds:

1. Calculate the total returns

A unit trust fund’s performance can firstly be measured by its total returns. A fund’s total returns represent the change in the value of an investment in the fund. Total returns can be identified in two ways – cumulative total returns and average annual total returns.

Cumulative total returns take into account the rise or fall in the fund’s unit price, while assuming that the income and capital gains distribution are reinvested into the fund. On the other hand, average annual total returns refer to compounded total returns, which are measured on an annual basis. Total returns, compounded over time, can really magnify.

When evaluating a fund’s performance, one of the best approaches is to compare the total returns of similar or correlated funds over the same period. For example, an equity fund would be best compared with another equity fund that invests in companies of a similar business nature. A bond fund would be compared to other funds with a similar maturity period or credit rating.

However, it is important to ensure that the fees and charges are deducted from the total returns for a more accurate figure. This figure only addresses the fund’s total returns against its peers in a specific period, without considering its unique individual risk.

So, where can you find this information? It is usually available in a fund’s annual prospectus or semi-annual report.

unit trust

Sample page from a unit trust fund’s prospectus

2. Compare a funds performance against its benchmark index

Another way to evaluate a fund’s performance is to measure it against a benchmark index. Unit trust funds investing in Malaysian equities typically evaluate their progress by benchmarking it against the FBM KLCI Index.

A fund is considered to have outperformed its benchmark index if the fund’s returns are higher than its benchmark.

As benchmark indices are well-established and commonly used to represent current market conditions, comparisons with it are widely accepted as a fund evaluation method. Comparing your fund’s performance against its benchmark will also show you the value-add brought by your fund managers.

Lookout!
For this fund evaluation method, you need to compare the performance of your unit trust fund against related peer funds. Reason being, although your funds may perform well against the corresponding benchmarks, they also tend to outperform other related funds.
graph 2

Sample page from a unit trust fund’s prospectus

3. Consider performance relative to risk taken

One way to measure this is by looking at the Sharpe ratio – also known as the reward-to-volatility (risk) ratio – which measures a fund’s historical risk-adjusted performance. The higher a fund’s Sharpe ratio, the better the returns generated per unit of risk taken. In other words, when you compare two funds of a similar nature, the fund with the higher Sharpe ratio would have generated more returns for the equal amount of risk exposure. A higher Sharpe ratio also indicates consistency in returns generated.

As it is complicated to calculate the Sharpe ratio of a fund using the mathematical formula, you may want to refer to your unit trust agent or unit trust fund performance rankings that are available online or in print.

unit trust

Sample page from an online unit trust distribution website

Conclusion: Be an informed investor

Unit trust fund rankings or ratings, and other methods of evaluating a fund’s performance only enable you to compare the performance of your unit trust fund with other funds. Unfortunately, many investors often misinterpret these evaluations as recommendations, when they are not.

Before you invest in a fund, it is imperative that you equip yourself with the necessary information and knowledge to make informed decisions. Request for the fund’s prospectus from your unit trust agent (or obtain it online), and read it thoroughly to understand the fund’s goals, risk factors and performance records.

Always keep in mind that a fund’s past performance is not a reliable indication of its future performance; a more accurate indicator would be its long-term track record. Reason being, in the long term, financial markets and economies globally will go through various cycles. Investors should therefore consider how different unit trust funds perform over various time frames to gain a better understanding of how funds react under different market conditions.

Although fund evaluation methods provide insight into a fund’s performance and can assist investors with their investment decisions, it is not failsafe. You will still need to do your due diligence on the funds in which you are considering to invest. You also need to match your investment goals with the fund’s ability to perform within a stipulated time frame, and the level of risk you are willing to take on.

Image from Financial Planning for Canadians

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].

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How To Make Your Investment Capital Work Harder

How To Make Your Investment Capital Work Harder

Warren Buffet once said, “Never depend on a single income. Make investments to create a second source.”

Most people would agree with Buffet, who is often regarded as one of the most successful investors of all time. Given a choice, wouldn’t you want to become a successful investor like him? Fortunately, there are ways to make even a modest initial investment amount work harder for you.

You don’t need to “sacrifice” hundreds of thousands of Ringgit upfront to earn healthy returns. We have talked about this before – you can indeed invest with just RM1,000. Now, we’re going to help take your RM1,000 to the next level and  maximise your investment capital.

Eliminate cost

First up, we’ll have to face the fact that investing will cost you some money. To get started in investing, you have to be prepared to pay some fees by default including management fees, sales charge, commissionand a few other related fees, depending on the investment product.

This is why one of the most basic methods for achieving good returns is to opt for an investment product that does not come with these charges, or with the least of these charges.

For example, many Amanah Saham Nasional Berhad (ASNB) investment products do not come with sales charges. Here are two examples of ASNB products in comparison with the AMB Ethical Trust Fund:

 
Amanah Saham Bumiputera (ASB)
Amanah Saham Wawasan 2020 (ASW2020)
AMB Ethical Trust Fund
Price
Fixed at RM1.00 per unit
Fixed at 
RM1.00 per unit
As per Net Asset Value (NAV) 
(e.g. RM 0.2407 per unit)
Minimum investment
10 units
(RM1 x 10 = RM10)
100 units
(RM1 x 100 = RM100)
1,000 units / RM500
Maximum investment
200,000 units
(RM1 x 200,000 = RM200,000)
Unlimited, subject to 
availability of units 
of the Fund.
Unlimited
Restrictions
Bumiputera only
Malaysians only
No restrictions
Average returns (2013 – 2015)
7.48 of Net distribution per unit (sen)

1.00 sen bonus per unit
6.57 of 
Net distribution 
per unit (sen)
8% per annum
Charges
None
None
•2% sales charge
•1.5% annual management charge
•0.07% annual trustee fee
•1.65% annual expense ratio
* Subject to 6% GST

Both ASB and ASW2020 do not come with sales or redemption charges. In simpler terms, this means that when you sell or cash out your units, you will get the true value of the units.

Here’s how it works:

 

 
ASB
ASW2020
AMB Ethical Trust Fund
Total investment
RM1,000 (1,000 units)
RM1,000 (1,000 units)
RM1,000 x RM0.2407
= 4,154 units
Potential returns
1,000 units x 7.48 sen 
= RM74.80
1,000 units x 6.57 sen 
= RM65.70
RM1,000 x 8% 
= RM80
Bonus
1,000 units x RM0.01
= RM10
Not Applicable
Not Applicable
Investment cost
Not Applicable
Not Applicable
RM55.33^ 
(inclusive of GST)
Your total returns for Year 1
RM74.80 + RM10
RM84.80
RM65.70
RM80 – RM55.33
RM24.67

^ Calculation of investment costs based on a RM1,000 investment
- Sales charge 2% – RM20
- Management fee 1.5% – RM15
- Trustee fee 0.07% – RM0.70
- Expense ratio 1.65% – RM16.50
- GST 6% – RM3.13
 

 

From the example above, earning a return of RM80 means only pocketing RM24.67 after all the investment charges are deducted. With a small capital, every sen counts, which is why it’s important to consider investment products with cheaper related fees.

Remember, not all unit trust funds impose high fees and charges, in fact some funds  even periodically offer to reduce these fees. As an investor, it is your right to seek information and you should do so as much as possible.

Ringgit cost averaging

With a small investment capital, it’s even more important to ensure you are buying your investments at the right time and right price. One way of doing this is to regularly top up your investments, but this doesn’t mean that you can just pump money in on a random basis. There is an art and a science to it.

It is known as the Ringgit cost averaging concept, you essentially invest a fixed amount at fixed intervals. For example, with an initial investment of RM1,000, make it a habit of adding an additional amount every month. This ensures that you continue to build your investment while minimising risk.

This is a workable alternative to putting in a huge lump sump for the initial investment. Instead, you spread out your investment risk by choosing to invest over a period of time.

Here’s a simple table to illustrate the difference between investing a lump sum (RM5,000) versus the Ringgit cost averaging method (RM1,000 + RM364 x 11 months):

 Lump sum investmentRinggit cost average
Initial sumRM5,000RM1,000
Regular monthly depositNoneRM364
Investment period1 year1 year
Unit priceRM0.60 per unit at purchaseAverage RM0.54 per unit over 12 months#
Units acquired8,333 units9,102 units

#Based on the unit price in the example here

 

From the example above, you can see how sometimes a modest capital may work better for you. Putting RM5,000 in an investment when the price is not in your favour can hurt your investment, whereas by spreading out your investment capital, you can also spread out the risk and get more units in return. Ultimately, you’ll end up with better value on your investment.

The added benefit of this is that you don’t need a huge sum to invest upfront, you can treat it as a monthly savings effort while reaping possibly greater benefits than lump sum investing. It’s a great step for first-time investors.

Invest for the long-term

You need time to let your money work and grow, which is why the best way to make your small investment work for you is to give it a longer timeframe.

Take note that the longer your investment time horizon, the more time your money has to grow thanks to the power of compounding interest. Compounding interest basically means any returns you get from your initial investment will get reinvested to earn additional interest on top of it. This works best if you do it together with Ringgit cost averaging.

With the magic of compounding interest, a mere RM1,000 investment can go a long way. Here’s the difference between a 3-year and a 10-year investment period in bonds:

 3-year10-year
Investment capitalRM1,000RM1,000
Average rate of return5% per annum5% per annum
Potential returnsRM157.63RM628.89
Average annual returnRM52.54RM62.89

As you can see, even though you’re only investing for just a little more than three times longer, you’ll get roughly 4x the return.

So remember, investing is not just something for the affluent. You don’t need a huge sum of cash to invest. Even with a small capital of RM1,000, you can make your investment work in your favour. All you need to do is to implement the above three methods to maximise your returns.

Making an informed investment decision is all about understanding your own finances and risk profile, but to also have a clear idea of how much time and money you need to invest, as well as the necessary fees to avoid or reduce in order to obtain the maximum best returns possible.

 

https://www.imoney.my/articles/how-to-make-your-investment-capital-work-...

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].

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Getting Started In Unit Trust Investing

securities-commission-malaysia      invest smart

 

To most Malaysians, the term “unit trust investing” involves a few simple steps where one deposits money into a fund, and then patiently waits for an increase in value while forgetting about it. If only it were that simple, right? Well, the good news is unit trust investing is indeed not that difficult, and in this infographic we are going to show you how to get started!

With hundreds of unit trust funds to choose from, how would you go about making an investment decision? As a general rule, always remember that unit trust funds work best as long-term investments. By understanding the nature of each fund and evaluating your own risk tolerance, you can select funds that provide either a regular income stream or capital growth, or a combination of both. By spreading your investment amongst different trust funds, you can create a unique unit trust portfolio that controls risks and generates potential returns. Now let’s get started!

 

https://www.imoney.my/articles/getting-started-in-unit-trust-investing

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].

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Trust Doesn’t Rust: 6 Questions You Should Ask Your Unit Trust Agent

...

Trust Doesn’t Rust: 6 Questions You Should Ask Your Unit Trust Agent      

For beginners, the idea of investing in unit trusts is appealing as we can leave the stock and bond picking to the professionals. Since many of us do not have the time and expertise to study the performance of individual stocks to identify the “winners”, we may feel it is better to let a professional fund manager do the job for us.

While this may seem like an easy way out, there are six important questions you should ask your unit trust agent before deciding on where to park your money.

1)  What will my returns look like?

One way to gauge a fund’s potential is by looking at its risk level. In general, the higher the risk, the higher the returns are likely to be. However, it is important to note that the key word here is “likely” as there is no guarantee. High-risk investment vehicles can still sometimes crash and lead to financial losses.

How much risk you should take will depend on your investment timeframe, risk appetite and lifestyle needs. You have to be very mindful when weighing these aspects so you will be able to handle any potential financial downturns.

 

2)  Could I end up making a loss?

Unit trust investments take the middle ground between high-risk and high-return investment vehicles like stocks, and low-risk low-return vehicles like fixed deposits.

However, like any other type of investment, there is an element of risk involved with unit trusts.

As unit trust funds are investments spread out over several types of investment categories, including stocks, bonds and commodities, there is a reduction in risk as it is unlikely that every single company that the fund invests in would fail.

However, if a unit trust has funds invested entirely in one country/region, should that area face a sudden economic downturn or crisis, your funds could quickly lose their value regardless of the asset or industry spread.

It is important to ask your unit trust agent to explain the worst case scenario before you dip your toes into the investment.

 

unittrust3

3)  What are the upfront and hidden costs?

It is important to be aware of upfront and hidden charges, including yearly management fees as they will erode your profits. Knowing just how much you are paying will enable you to make a meaningful comparison among the cost structure of different funds.

Since these charges are paid up front, it will take some time before you break even, much less make a profit.

 

4)  How do I select the funds that are most suitable for me?

To choose the right funds, you need to be clear about your financial objectives and financial goals. For example are you aiming to generate income or preserve your capital?

Then, think about your investment timeframe and risk tolerance. Are you saving for the short-term to cover a property down payment, or are you saving for a long-term goal such as your newborn’s eventual tertiary education?

In general, younger investors can afford to optfor higher-risk funds, as they have a longer time horizon and more years of earning potential ahead. This will allow them to ride out the market’s highs and lows while benefiting from compound interest.

Other important factors to consider are your financial holding power and how much you can afford to lose as an investor.

Your unit trust agent should then be able to match the right funds to your risk profile and investment goals.

 

5) How much should I invest?

Again, this would depend on your financial objectives. For those who are saving for retirement, investing in unit trusts can be a useful method for combating the ravages of inflation while preserving the value of their earnings.

According to the Organisation for Economic Co-operation and Development (OECD), in order to maintain the same standard of living post-employment, one should start saving at least 33% of his/her monthly income as early as age 25, to have at least 2/3 of his/her monthly income in retirement.

Your Employees Provident Fund (EPF) contribution provides only 23% to your savings every month (11% from you, and 12% from your employer) – still 10% short of what OECD recommends. Worse, with a projected inflation rate of 3% to 4% per annum, the value of your savings could be significantly reduced over the next decade.

6) What are some of the risks?

Unit trust investments are subject to social, economic and political conditions. Some of the risk factors that unit trust investors face include market risk, default risk and inflation risk.

Market risk occurs when you lose money due to fluctuations in market prices. Default risk happens when the issuer of a bond (companies or individuals) is unable to make timely principal and interest payments.

Inflation risk is the possibility that the value of assets or income from an investment shrinks due to changes in purchasing power attributed to inflation. Any changes in foreign currency exchange rates will also affect the returns of the respective funds.

Conclusion

By asking your unit trust agent the right questions, you will have a better chance of being able to make an educated and informed investment decision — resulting in (hopefully) the “correct” answer of potentially higher returns.

https://www.imoney.my/articles/trust-doesnt-rust-6-questions-you-should-...

 

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].

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Can I Invest with Just RM1,000?

securities-commission-malaysia      invest smart

When it comes to investing, one of the most common excuses cited by people who are hesitant or afraid to start investing is a lack of capital. Why is this so? This can probably be attributed to the common misconception that you need a huge sum of money to kick-start your investment dream.

The fact is, you don’t need to be the next Robert Kuok to be able to invest. You can start small, and slowly build your investment into a healthy and solid portfolio.

Remember, you don’t need to commit hundreds of thousands of Ringgit up front to eventually see a healthy return.

 

https://www.imoney.my/articles/can-i-invest-with-just-rm1000-infographic

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].

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Need For Speed: The Time Value Of Money [Infographic]

securities-commission-malaysia      invest smart

The most fundamental key to investment is to know that your money has a “time value.” Simply put, a Ringgit you receive today can be invested and grown to more than a Ringgit after some time. Understanding the time value of money will bring you far in your investment journey.

The infographic below highlights the importance of time value of your money, and how it will benefit you in the long run:

Time value of money 2

 

Everyone has different financial goals that are expected to be fulfilled at different stages of their lives. More often than not, we have more than one goal. Therefore, it is important for us to identify these goals, the timeline and how to achieve them.

For a short-term objective like saving up for your housing down payment, first you need to know what your goal is. Are you planning to buy a property that costs RM500,000? This means you will need to save up at least RM50,000 in cash. Next, you need to decide on your timeline. How much time will you give yourself to save up that amount?

Knowing your timeline will also help you in deciding the best investment vehicle to put your funds into. For a short-term goal like this, a five-year period should be sufficient.

Investment is also closely related to risks. Knowing your risk appetite will help you allocate your assets wisely. The longer your time horizon is, the bigger the risk you can afford to take. Having a low risk tolerance doesn’t mean you stay away from higher risk investments like stocks. It just means that you allocate lesser assets in high risk investments.

With time on your side, you can use the power of compound interest as leverage. The longer your money is left to be compounded to the rate of return of a particular investment or fund, the faster your fund will grow.

Knowing the difference between purely saving your money (stashing it in a savings or fixed deposit account) and investing your money (in higher yield investments), will get you closer to realising your financial goals.

 

Dreaming of fulfiling your financial goals? Here is why it’s crucial for young investors to get started as soon as possible.

https://www.imoney.my/articles/need-for-speed-the-time-value-of-money

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].

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Young Investors: Why Aren’t You Investing?

 

 securities-commission-malaysia    invest smart

women money tree

Getting your first job and entering the real world can be exciting, but also daunting. You didn’t expect it to be this hard to stretch your entry-level salary to survive. It is far too easy to fall into the paycheck-to-paycheck lifestyle, unless and until you make your money work for you.

Time is the biggest boost to the value of your money. The more time you have, the higher the value will be. Understanding the time value of money is critical for all investors, particularly young investors who have all the time in the world to take the risk and potentially gain a lot from their investments.

Building your financial portfolio does not just depend on your career. Yes, it is an important and vital part of achieving financial freedom but youths today should expand their horizon to give their finances a boost with the right investment.

Just like saving money, money put into investment compounds over time at different rates of return. If younger investors want any chance of achieving their short and long term financial goals, be it getting married, buying their first home, or even retirement, they are going to need to overcome their aversion to investing and delve in.

When reality bites

If you are earning RM2,500 a month, your monthly expenditure might look like this:

SC young investors table

As you can see, with a net income of RM2,500, you will only have 34% balance after your usual monthly expenses — and that’s with the most basic expenses. That’s not a lot left. If you leave this extra cash in your savings account (3.38% per annum), you will only get RM217.87 after religiously depositing RM850 every month for 12 months.

Perhaps a fixed deposit account can earn you a higher return? The highest fixed deposit rate in the market now is at 4.15%, and after 12 months and a total of RM10,200, you will get a meagre RM268.17.

That’s hardly enough to pave the way to financial freedom, or to protect your funds from inflation.

What’s plan B?

There has to be a better way to grow your funds than these two options. One of the lower risk investment vehicles one can start with is unit trust funds. With time on your side, the sky is the limit for your return.

For example, if you invested RM3,000 in a moderately risked fund that was a mix of equities and fixed income which saw a 55% growth over three years, you could come out of it with an extra RM1,500. And these growth numbers are real with many funds performing as well as this.

Find out what are the potential returns for other unit trust funds now!

Being young means you can let your money grow for the next 20 to 30 years to achieve your short term and long term goals. Want to save up the down payment to buy a property? How about getting an MBA? And ultimately saving for a comfortable retirement? All these can be achieved if you start early.

One thing that most non-investors do not know is you don’t need to have thousands of Ringgit to start investing. If you are 25 years old now, you have at least 35 years of income to invest and grow before retirement.

Don’t fear the unknown

Some of the common excuses that stop young investors from investing are not having enough money, thinking it’s too complicated, or just not knowing their options. The problem is, most of these people who use these excuses have not even tried, but are quick to give up based on other people’s past experiences.

Yes, investing comes with risks. An article published on Forbes said investing in stocks is akin to a dance step — two steps forward, one step back.

It’s true but it’s not necessarily a bad thing for young investors. With time horizon on your side, you will still gain, as two steps forward for 35 years amount to a lot of steps forward for your money, despite the steps backward.

Time can mitigate risk and this also means you can take bigger risks because you are able to bounce back. Investing requires knowledge and research but you don’t need to be a rocket scientist, or have formal education on investing before you can start.

Young investors just need a push in the right direction to get started. Don’t let the jargon intimidate you. Remember, not investing poses a bigger risk than all the investment risks combined.

https://www.imoney.my/articles/young-investors-why-arent-you-investing

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].

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The Risks of Investing in Unit Trust Funds

Investing is known to be an adventure that is filled with risks. However, the type of investment you choose will determine the degree of risk that is involved.

Investing is known to be an adventure that is filled with risks. However, the type of investment you choose will determine the degree of risk that is involved. Thus, before we invest in any funds, we should be very clear of the potential risks involved.

 

Unit trust funds are widely known for having lower risks due to its widely diversified portfolio holdings. Nevertheless, this does not mean that it is a riskless investment. it is crucial that we study the risks involved and make sure that it is well aligned to our risk profile before we make our decision to invest in the funds.

 

At the end of this article, you will learn the general risks that are inherent in unit trust investment, regardless of the type of assets or sector being invested in.

 

Fund Manager Performance risk

Unit trust funds are professionally managed by fund managers and therefore, the performances of the funds are highly dependent on the managers’ styles and abilities. Good managers are those who are able to produce consistent good results through good or bad times. However, it is difficult to determine whether the fund manager is going to be able to deliver good results even though we may refer to their track record as guidance. For example, if a key member of the fund management team decides to leave during our investment period, it may have an adverse impact to the investment process.

 

Loan-financing risk

Unit trust is considered as medium to long term investment. Financing unit trust investment using loan increases both the possibility of gains and losses. The returns of unit trust funds are not set in stone, thus we cannot rely on it to repay the loan. There could be times when the value of our unit trust holdings falls below certain level, and we may be required to top up our collateral or reduce our loan amount. When the interest rate is on the uptrend, the cost of loan repayment will increase as well. Therefore, you should weigh all pros and cons before deciding to finance your fund investment with borrowed money.

 

Country and Currency risks

If the unit trust investments are in foreign market and denominated in foreign currency, we may also bear the risks of any changes in the country’s political, regulatory or economical situation that will adversely impact the value of our investments. Any fluctuation in the foreign currency, especially the weakening of the currency will also reduce the asset value of the foreign investments.

 

Equity investment risks

When unit trust funds are invested in equities, the overall market situation causes many internal or external factors that will have an impact to the value of the unit trust holdings. For example, in the recent euro zone debt crisis, even though it happened in the European countries, however, the impact rippled through the entire global economy, which includes our local market. No matter how diversified the equity holdings are, the investments will not be free from market risk.

 

There are also company or sector specific risks. Company specific risk could be arising from changes in the management team, the company losing its competitive edge, or any other factors that are causing the company not meeting its financial target, while sector specific risk could be coming from changes in certain economic condition that affects the entire sector. These types of risks are particularly obvious in smaller size funds or sector specific funds.

 

Fixed-income securities risks

Bond funds or sukuk funds are exceptionally sensitive to changes in interest rates. The up and down trends on the interest rates would affect the net asset value of the funds. The longer the maturity of the debt securities and the lower the coupon rates of the debt issues, can also cause interest rate changes. This in turn could trigger early redemption of the issuer which will result in early return of principal to the investors.

 

Apart from that, all bonds are subject to credit risk, which refers to the ability of the issuer to make timely coupon payment or principal repayment. In the event that any of the bonds being invested by the unit trust funds facing default on its payments, it will negatively impact the net asset value of the funds.

 

As investors, we must evaluate all the risks that may occur in the potential investments that we make. Get to know your investment products so that you are able to make wise and informed investment decisions.

 

Brought to you by Securities Commission Malaysia, as part of its ongoing efforts to create well-informed and savvy investors in the capital market. The information provided in this article is only for educational purposes and should not be used as a substitute for legal or other professional advice. For more information, log on to www.investsmartsc.my, call 03-62048888 or visit our Facebook page at www.facebook.com/InvestSmartSC

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].

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Types of Unit Trust Funds in Malaysia

Unit trust funds provide retail investors with the opportunity to diversify their investments into various financial assets.

Unit trust funds provide retail investors with the opportunity to diversify their investments into various financial assets. With unit trust funds, the money collected is invested by the fund manager in different types of stocks, bonds, or other securities depending upon the objective of the fund. You can make an initial investment with as little as RM10 to RM100 (depending on the type of fund) and buy additional units when you have more money, or invest a fixed amount on a regular monthly basis. Hence, unit trust is one of the investment products for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio.

 

There are many types of funds that can satisfy the needs of different investors. In this leaflet, we will take a look at the various types of unit trust funds available in Malaysia. Upon reading this leaflet, you will be able to identify the different types of unit trust funds in Malaysia and consider which of them would suit you better.

 

1) Equity Unit Trust Funds (Equity Funds)

 

An equity fund invests mainly in the stocks of listed companies, and is the most common type of unit trust fund available to investors in Malaysia. People who would like to put their capital into listed companies can choose to invest in this type of fund. This also means that in general, the performance of Malaysian equity funds tend to move in line with that of Bursa Malaysia’s. For example, if the market rises, the value of the unit increases, and vice versa.

 

 

2) Bond / Fixed Income Funds

These funds invest mainly in Malaysian Government Securities, corporate bonds, and debt instruments, such as mortgage-backed securities. This type of fund focuses on providing regular income to the investors, with less emphasis on providing capital growth. Therefore, the prices of the funds are usually more stable compared to equity funds. However, during times of volatile interest rates, the fluctuation may be significant as fixed income securities are sensitive to movement in interest rates.

 

3) Balanced Funds

The investment holding for this type of fund combines higher risk equities, lower risk fixed income securities and cash in order to maintain a balance of both capital growth and regular income for investors. This type of fund usually provides better shelter during a market downturn but on the flip side, may lag behind during a bull run.

 

4) Money Market Funds

These funds invest in low-risk but highly liquid investments, such as short-term debentures, short-term money market instruments and placements in short-term deposits. In general, money market funds tend to carry the lowest risk. You will usually be spared from unpleasant “surprises” when you invest in money market funds, but do not expect high returns either. In the long run, returns from money market funds may not be able to catch up with erosion in value of the investment or capital due to inflation.

 

4) Capital Guaranteed Funds

A capital guaranteed fund or CGF is a unit trust fund with a limited lifespan, usually between three to five years, that is structured to guarantee investors of their investment capital at maturity. The main element of the CGF is its capital preservation feature. A CGF is guaranteed by guarantors and normally they are licensed financial institutions such as banks or merchant banks with good credit ratings. These banks will receive guarantor fees in exchange of their guarantees. These fees will be borne by the investors of the CGF.      

 

Even though the SC’s Guidelines on Unit Trusts requires the guarantor to have a good credit rating from either a domestic or global rating agency, there is always the risk of default by the guarantor.

 

 

OTHER TYPES OF UNIT TRUST FUNDS

 

Islamic Unit Trust/ Shariah Funds

Shariah funds are almost similar to conventional unit trust funds, with the difference being the portfolios of these funds are invested based on Islamic principles, which means the investments can only be made in Shariah-compliant securities that are not involved in non-halal businesses such as gambling, alcoholic beverages and the production of non-halal products. In addition, the fund also excludes shares of companies that are involved in conventional banking, insurance or financial services.  The returns offered by an Islamic unit trust will avoid the incidence of 'riba' (usury interest) through the process of cleansing or purification by the removal of such amount representing the interest element, which is then normally donated to charities.

 

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. REITs also provide an easy way for investors to obtain real estate without the headache of being actual property owners.

 

REITs invest mainly in real estate and derive stream of income from the rental of the properties. According to the guidelines set by the SC, a REIT must have at least 50% of the fund’s total asset invested in real estate and single-purpose companies, which are unlisted companies with real estate as principal assets.

 

Exchange Traded Funds (ETF)

 

An ETF is a unit trust scheme that is listed and traded on a stock exchange. An open-ended fund with no expiry date, it usually tracks or replicates the performance of a benchmark index. This means that ETF investors hold units of a fund that invests in a number of securities.

 

ETFs offer investors a cheaper and easier way to gain exposure to a basket of securities represented in an index through a single transaction. The basket of securities could consist of either stocks, bonds, commodities or other instruments.

 

Investors can buy or sell units of the ETFs on the stock exchange through any remisier, just like how they buy or sell stocks. They are required to have a Central Depository System (CDS) account and a trading account - that they use for trading stocks - to trade ETFs. In Malaysia, a single trading lot for ETF consists of 100 units. This means investors can buy or sell a minimum of 100 units for each lot.

 

 

Types of Unit Trust Funds in Malaysia Comparison Table

Type of Fund

Description

Objective

Additional Information

Suitability

Risk

1)Equity/Growth Fund

Invests primarily in stocks. Targeted at aggressive-risk investors. Offers higher volatility and risk-return rewards

To provide capital appreciation over the medium to long term

Up to 95% of its Net Asset Value (NAV) comes from stocks and shares of companies listed or unlisted in Bursa Malaysia

This fund is ideal for investors who have a long term outlook of the market and are seeking growth over a period of time

Can be very volatile due to the high exposure of its assets in stocks and shares trading

2) Income/Bond Fund

Up to 90% of its NAV is from corporate or government bonds and debentures.  Targeted at conservative-risk investors as it offers low volatility

To provide a regular and steady income

 

This scheme generally invests in fixed income securities such as bonds, corporate debentures and Government securities

Income Funds are ideal for capital stability and those seeking a regular income

Defaults by the bond issuer

3) Balanced Fund

Invests in BOTH stocks and bonds. Medium volatility due to smaller exposure to stocks

To provide both growth* and regular income to the investors

 

 

 

*growth:

an investment style that looks for stocks with strong earnings and/or revenue growth or growth potential.
 

Generally invests in stocks and shares of companies listed or unlisted in Bursa Malaysia. The rest of its NAV goes into cash deposits or fixed-interest securities like bonds, government securities and etc

For investors seeking earning distribution. Suitable for moderate-risk investors

The risk exposure is reduced in the event of an adverse share-market correction since only up to 60% of its NAV is exposed to stocks and shares

4) Money Market Fund

Makes short-term investments (usually less than 365 days), meant to temporarily "park" the liquid funds while waiting for other opportunities to invest or to sit out a volatile market

Aims to provide easy liquidity, preservation of capital and moderate income for conservative investors

 

 

 

 

These funds generally invest in short-term instruments such as treasury bills, certificates of deposits, commercial papers and inter-bank call money market*

 

*inter-bank call money market: A short-term money market, which allows for large financial institutions, such as banks, mutual funds and corporations to borrow and lend money at interbank rates. The loans in the call money market are very short, usually lasting no longer than a week and are often used to help banks meet reserve requirements

 

Ideal as a means to  place surplus funds for short periods. There is no service charge nor redemption cost applicable.

Returns on these funds fluctuates depending upon the prevailing interest rates in the market

5) Capital Guaranteed Fund

Your capital is preserved even in negative or bearish market conditions since it is guaranteed

 

Requires you to invest for a period of 3 or 5 years. At the end of the period, your capital is guaranteed

 

Potential of receiving a return on investment even in a positive or bullish market.

Returns are also potentially higher than interest or dividend from a savings account

 

For investors seeking preservation of capital

 

Unless the fund issuer/guarantor defaults, the capital is preserved

Note: The information provided in the table above are examples and may differ from fund to fund of the same type.

Conclusion: Making Your Selection

 

There are a wide variety of choices on offer when it comes to types of unit trust funds available to Malaysian investors. In order to determine the most suitable fund for you, always remember the following basic guidelines:

  • Investors have specific individual needs and objectives — For example, are you investing as part of your retirement planning? Or are you investing because you are preparing an education fund for your child? Aligning your specific needs and objectives with your own risk profile will help you to arrive at a clear decision when selecting the unit trust fund.
  • Determine your risk profile — You should always assess your risk profile and determine exactly how much of risk you can take or accept. In short, how much money are you prepared to lose if the investment does not give distributions? Different funds bring different degrees of risk, so choose carefully.
  • Do your homework first — Before committing to the investment, obtain all the relevant and crucial sources of information on the fund by reading the prospectus, annual report, business sections in the newspaper and more.
  • Past performance does not guarantee future success — Although a fund’s historical results is not a guaranteed reflection of its future performance, the long-term track record of a unit trust fund will reflect the fund manager’s ability to negotiate the fund through different market cycles. Since a unit trust fund investment is meant for the long term, focus on long-term performance when comparing different unit trust funds to make an informed investment decision.
  • Monitor your investment from time to time — Always ensure that your unit trust fund investment is meeting your investment objectives. Monitor its performance, the current value of your investment as well as its distributions. You should review your investment at least once a year or if your financial situation has changed.

 

Be a wise investor, be informed!

 

 

Brought to you by Securities Commission Malaysia, as part of its ongoing efforts to create well-informed and savvy investors in the capital market. The information provided in this article is only for educational purposes and should not be used as a substitute for legal or other professional advice. For more information, log on to www.investsmartsc.my, call 03-62048888 or visit our Facebook page at www.facebook.com/InvestSmartSC

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].

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11 Questions You MUST Ask Your Unit Trust Consultant

If you are an amateur investor or one with little knowledge in investing in unit trust, more often than not, you will be relying solely on your unit trust consultant (UTC) for advice.

If you are an amateur investor or one with little knowledge in investing in unit trust, more often than not, you will be relying solely on your unit trust consultant (UTC) for advice. However, would you be able to know if your consultant is acting in your best interests as an investor? As an informed investor, you have the right to ask your consultant as many questions as necessary, because it is your hard earned money that is on the line. This article will help you to:

  • identify the key questions you need to ask your unit trust consultant; and
  • make an informed decision for unit trust investing after asking the questions.

 

Question #1: Is this unit trust fund approved by the relevant body/ Is it a legal unit trust fund?

All unit trust investment products must be approved by the Securities Commission, Malaysia (SC). To ensure that an investment product is approved by the SC, call        03-6204 8000 and ask for the Managed Investment Schemes Department or visit the SC’s website at www.sc.com.my under the “Data & Statistics” section.

Question #2: How can I gauge the performance of a unit trust fund? Where can I find information on the unit trust and relevant fund management company?

 

You can find out the track record of a unit trust fund by reading the latest annual reports. However, you need to remember that the past performance of a fund does not guarantee its future performance. Information regarding the unit trust and relevant fund management company can be obtained from the prospectus. Make it a point to read through and understand the prospectus before investing.

 

Question #3: Does the fund suit my investment goals and risk profiles?

Before your UTC can answer this question, it is important that you sit down with him to discuss and come to an agreement on this first. With many categories and types of funds in the market, each with its own benefits and risks it is imperative that  you  understand the funds being offered and for you to choose a fund or funds that really suit your investment goals and risk tolerance. You should not be pressured by any UTC to invest in a fund that is not suitable for you. “Do not invest in something you do not understand!”

 

Question #4: What will happen to the money that I put in a

fund? Where will it be invested?

Each unit trust fund has its own investment objective. You should understand the fund’s strategies in meeting these investment objectives. For example, for an equity fund, generally, most of the funds’ assets will be invested in equities of companies listed on the stock market. It is therefore crucial for an investor to know which investment products/instruments the funds will be investing in, as this will have a direct implication on risk tolerance of the investors.

Question #5: How do I know if my fund is doing well? How can I compare it with other funds?

Each fund has its own benchmark (something that you can compare its performance with), which is stated in the prospectus. You can compare the rate of return of your

fund with this benchmark. For example, for bond funds, it is normally the average 12-month fixed deposit rate of banks. Alternatively, you can compare your fund with other funds with similar characteristics. A more complex unit trust fund may have a more complicated benchmark.

 

Question #6: How will I make money from this fund?

If you invest in unit trusts, your returns will usually be in the form of :

(i) Capital gains (if the price moves favourably), and/or

(ii) Distribution of income (if the management company

announced any). Get your UTC to explain this and read the prospectus. However, be mindful of any promises made by your consultant. Consultants should not be promising you specific returns as a fund’s performance is influenced by various factors. you can contact the Federation of Investment Managers Malaysia (FIMM) at [email protected] or call 03-2093 2600.

 

Question #7: Do I have to pay any fees or charges?

Every investment will have costs involved and investing in unit trust funds is no exception. Generally, unit trust management companies will impose the following fees and charges:

(i) distribution / transaction charges, such as a sales charge and / or redemption charge, when you buy and sell units

(ii) management fees

(iii) trustee fees

Your UTC must explain this clearly to you. Read the prospectus for more details on the typical fees and charges imposed in a unit trust investment.

 

Question #8: If I change my mind after I have invested in a fund, can I sell it back to the company and get a full refund?

Eligible first-time investors are given a “cooling-off” period, which means the time given to investors to reconsider if they want to continue investing in the unit trust fund or otherwise. The cooling-off period is for six (6) business days from the date of receipt of an investor’s application by the management company.

 

Question #9: How easily can I sell the fund if I need my money right away? How long do I have to wait before I can get my money back?

Unit trusts are liquid investments. You may approach your distribution agents and submit a redemption notice to redeem the units and get your money back. Ask your

UTC for details regarding the period of redemption etc.

 

Question #10: Will I be getting any statements regarding my investment status from the management company?

Yes. Find out how frequently you will be getting such statements from your UTC.

 

Question #11: Where can I get more information about the fund?

Most of the information about a unit trust fund is in its prospectus and annual report. Ask your UTC for a copy of the prospectus and read it before investing.

 

 

Brought to you by Securities Commission Malaysia, as part of its ongoing efforts to create well-informed and savvy investors in the capital market. The information provided in this article is only for educational purposes and should not be used as a substitute for legal or other professional advice. For more information, log on to www.investsmartsc.my, call 03-62048888 or visit our Facebook page at www.facebook.com/InvestSmartSC

 

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].

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