What Is Unit Trust Investment?

Have you heard or read about unit trust? Have ever invested in this kind of portfolio? For middle to long-term period, I suggest to choose unit trust as investment method as it is also another kind of saving method. To achieve this purpose, let us find what is actually a Unit Trust?

What is Unit Trust?
A unit trust fund is a collective investment scheme, which pools the savings of investors with similar investment objectives in a special “trust” fund managed by professional fund managers. The pooled monies in the unit trust fund will then be invested in a diversified portfolio of securities and other assets in accordance with the unit trust fund’s investment objectives and as permitted under the Securities Commission’s (SC) Guidelines on Unit Trust Funds. The investment scheme of a unit trust fund can be illustrated as a tripartite relationship between the manager, the trustee and the unitholders. The manager is responsible for the management and operations of the unit trust fund whilst 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 SC). 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.(Source: www.cimb-wealthadvisors.com)

A unit trust fund (also known as is a collective scheme) is a professionally managed investment fund which pools the financial resources of individual and corporate investors with similar objectives. The aggregate sum is then used by the fund to make large scale investments in a selected investment portfolio which comprises stocks, bonds and other assets in accordance with the investment objective of the fund. This includes investments which may not ordinarily be available to individual investors through direct investment such as large commercial properties and corporate bonds.

Unit trusts should be viewed as long term investment vehicles most suited to investors who can tolerate volatile short-term fluctuations in prices in pursuit of potential for long-term capital growth which may be associated with riskier equity investments. (Source: http://www.oskuob.com.my)

How does it work?
A unit trust is created out of a deed which constitutes a contractual agreement governing the tripartite relationship between the Manager (often referred to as the management company), the unit holders (the investors of the fund) and the Trustee. As an investor, you subscribe for units in the fund which are equal in value in the unit trust fund. Thus, when you invest, your money buys units in that fund at a price that is struck for that particular day. The price of a unit reflects its total Net Asset Value, commonly referred to as the NAV (the fund’s assets less its liabilities, divided by the number of units in issue). Unlike stocks, whose prices are subject to change at each trade, the fund’s NAV is calculated only at the close of each business day. Hence the fund’s unit price is quoted in major newspapers on the following business day. Over the period in which you invest, the unit trust price will move up and down as the value of the investments comprising the unit trust fund rise or fall. Returns from a unit trust fund are typically calculated based on movements in the buying price of the unit trust fund (that is, the price in which the Manager of the fund will buy back units from unit holders) and assume any income distributions paid to unit holders are reinvested in the fund as additional units.

To protect your rights and interests as investors, an independent Trustee is appointed to ensure compliance of the Manager with the requirements of the Deed, Securities Commission Guidelines on Unit Trust Funds and the Securities Commission Act 1993. The Manager is also required to appoint an approved Company Auditor (within the meaning of the Companies Act 1965) for the purpose of conducting annual audits of the fund’s accounts which must be included in the fund’s annual report.

Benefit of Unit Trust Investing
Based from Federation of Investment Managers Malaysia (FMUTM), for an individual to maintain his own portfolio of investments, he needs to keep up to date with market information and sentiments. In today’s sophisticated financial markets, this means having to embrace of wide range 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 trust 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.

A. Affordability – Unit trusts are very affordable. Investors can start with an investment amount as low as RM500.

B. Diversification – Rather than concentrating an investment portfolio of 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.”

C. Liquidity – Most investors prefer their investment to be liquid. That is, they can easily buy and sell without difficulties. Unit trusts provide this benefit, easily bought and sold. 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.

D. Professional Fund Management – The people entrusted to manage unit trusts are approved professionals. Their training and background ensures 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.

E. 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 wants 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.

F. Wholesale Investment Costs & Access to Other Asset Classes – When making direct investments in the Bursa malaysia, the investor faces costs and charges that are much higher. With unit trust the economics of the transaction are more favorable i.e. the fees and charges/brokerage etc. per investment ringgit are likely to be less. Because fund managers invest in larger amounts, they are able to get access to wholesale yields and products which are impossible for the individual investor to obtain. For instance, unlike unit trust funds, most individual investors cannot have direct access to the Malaysian Government Security market because, amongst other reasons, the amount of each transaction could run into millions of Ringgit.

G. 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 legislations.The sole purpose of such regulations is to protect the interest of the investing public. Regulations provide investors with a level of comfort that they are investing in a safe investment mechanism.

WHO USUALLY INVESTS IN UNIT TRUST FUNDS

Unit trust funds are promoted as a long-term investment instrument. It is also a form of indirect mechanism for participating in capital market instruments. Generally, investment in unit trust funds carries a relatively lower risk-return profile, hence would appeal to you if you are a conservative investor with a long-term investment horizon and who lacks the time and skill to directly participate and monitor the investments in the various capital market instruments.