More About Equity: How Trust You Are In Equity Fund?

The common argument is that if investors were to hold them for the long-term, equities would perform better than fixed-income instruments. But in recent times, investors have had their faith questioned as volatility reigned supreme. For the last 10 years, the Kuala Lumpur Composite Index has gone through troughs and peaks, and is now at the levels seen during the peak of 1999. So, does the conventional wisdom generally work?

Any measurement of returns would depend on the time period of reference, say our interviewees. In general, stocks will perform better in the long run provided the long-term micro-economic cycle is favourable, says Yoon Mun Thim, chief investment officer of Prudential Fund Management Bhd. "Even then, economic activities would to be cyclical, and there would be periods of volatility punctuated by occasional corrections. If you had invested in equities during the Asian Financial crisis of 1997/1998, and kept them until 2007, from trough to peak, you would have made a gain of almost five times in your investment," says Yoon.

The equities market in unlike the bond market in that there are many opportunities to make a larger return but closer monitoring is required, says Chris Eng, associate director of OSK Research Sdn Bhd. This is because the less volatile bond moves in a narrow range while equity is highly volatile and moves in a wide range.

Historically, says Choo Seww Kee, chief investment officer of TA Investment Management Bhd, investors who have put money in the equity market near a short-term peak would likely suffer losses when the market decline but if they are patient enough and hold for the long-run, they were able to recover their value and have even done well compared to other safer investments. This is partially due to the cyclical nature of the investment market.

But, in recent years, equity markets have displayed greater market volatility. Greater volatility is partly due to the increased short selling and hedge fund activities in the market, says Choo. Moreover, the stock markets of developing countries like ours are more volatile due to the evolving capital markets, adds Yoon. "As a result, the 'buy and hold' strategy has somehow been distorted, says Choo. "The risk of having a 'buy and hold' strategy has somewhat increased and investors must now closely monitor their investment portfolio to maximise long-term returns. In other words, investors need to be more proactive and must use a 'sell strategy' when appropriate."

The question of "having faith in stocks" can be divided between the quality companies and "not-so-good" companies, opines Gary Gan, general manager of business development & marketing, Pacific Mutual Fund Bhd. "In bad times, because og negative sentiment and selling pressures, stock prices of all companies, good or bad, will undoubtedly fall, but note that history has shown that when markets eventually recover, the quality company's stock price will surge accordingly while the 'not-so-good' still be stagnant and perhaps even worsen more." The KLCI may not have moved much in 10 years but quality stocks and performing mutual funds have gained much more, he adds.

On the flip side, Puah Ser Sze, practice leader - investment consulting of Watson Wyatt (M) Sdn Bhd, thinks that one should take a forward-looking view instead of looking at the past. "For instance, we are currently facing an extreme market condition. We do not recommend increasing risk where there's more deleveraging to come. The excesses in the system that was built up over many years will take some time before it's sorted out."

So where does this put the investor? "For equity investors, it is often no whether you entered at the right time ot not, but more importantly, how you manage your portfolio that will determine how the end result will be," says Gan. Although the principles of looking at diversifying an investment portfolio - building a balanced asset allocation and ringgit cost average, seem all too wirn out and cliched, it still holds true, says Yoon.

About Equity Funds

Before you decide to invest in equities, you should understand three things:
$ What equities are
$ What equities' risk are
$ How owning them may fit into your financial plan


What is an Equity Fund? Fr: Wikipedia
This is a fund that invests in equities more commonly known as stocks. Stock funds are contrasted with bond funds and money funds. Fund assets are typically mainly in stock, with some amount of cash, which is generally quite small, as opposed to bonds, notes, or other equities. This may be a mutual fund or exchange-traded fund.

The objective of an equity fund is long-term growth through capital gains, although historically dividends have also been an important source of total return. Specific equity funds may focus on a certain sector of the market or may be geared toward a certain level of risk.

Stock funds can be distinguished by several properties. Funds may have a specific style, for example, value or growth. Funds may invest in solely the securities from one country, or from many countries. Funds may focus on some size of company, that is, small-cap, large-cap, et cetera. Funds which involve some component of stock picking are said to be actively managed, whereas index funds try as well as possible to mirror specific stock market indices.

Well, simply stated, equities represent ownership in a corporation. A corporation sells stock to raise capital and each share of stock represents a piece of the company. An equity fund may hold numerous carefully selected stocks. The fund manager selects these stocks because he or she believes they can work towards achieving a fund's stated objective, which could be long-term growth, total return, capital appreciation or a combination of the three. Stocks also can be combined with bonds to create funds that offer both growth and income.

What Equities Risks Are
Historically, equities have been long-term performers, but they also have a history of greater price volatility than bonds and cash equivalents. Equity funds may offer some degree of diversification because they hold many different stocks. But, they can be volatile and their share prices often can move substantially higher or lower on a daily basis.

Equity investments may fluctuate for a variety of reasons. Three common ones include news about a company, economic developments and changes in interest rates.

How Owning Them May Fit Into Your Financial Plan
Because of the potential long-term rewards equity funds may offer, they are often used to work toward long-term goals such as retirement, a child's college education or buying a home. Because of the risks involved, financial advisors may suggest combining equity funds along with lower risk investments as part of an investor's long-term financial plan.

Source:
a. https://www.oppenheimerfunds.com
b. http://www.wikipedia.org/

How To Buy and Sell Unit Trusts & How to invest in Unit Trust Fund

To invest in a unit trust you need to buy units by 8pm the day before. The major issue with a Unit Trust is that you are unaware of the price that you are buying at as the price is not set until after you have decided to buy into the trust.

At 8am every working day, new unit prices will be calculated for the funds. This is called the Valuation Point.

The orders received to buy units in the trust are then calculated the following day. This process is called forward pricing.

You can invest in a unit trust on a monthly basis allow it to build up overtime. Funds normally charge a fee when you join the trust but after that you can pay in your monthly amount without charge.

Dual Pricing and Unit Trust.

Unit Trust run on a duel price system. There is a price at which you can buy units in the trust and a different price at which you can sell your units in the trust.

The price at which they are bought is called the offer price and the price at which they are sold is called bid price, this mirrors the way that the underlying stocks are bought on the stock market. The difference between the two prices is called the spread. The offer price includes any buying charges within the fund.

Selling Your Unit Trust

You can sell you investment in a unit trust at anytime, you can sell some or all of your units at the bid price, the bid price is set on the underlying market value of the shares that it contains. The bid price is always lower than the offer price. You sell your units via your fund manager.

Forward Pricing

What Does Forward Pricing Mean?
A Securities and Exchange Commission regulation that requires that investment companies price all of their buy and sell orders of fund shares according to the next net asset value (NAV). This valuation process is for open-end mutual fund transactions in which the mutual fund itself is constantly issuing and redeeming mutual fund shares at the most recent NAV per share.

Investopedia explains Forward Pricing
Forward pricing is implemented when a trade is placed to buy or sell shares of an open-end mutual fund. This occurs because open-end funds only recalculate the net asset value of their mutual fund shares after the market closes each trading day. As a result, any mutual fund order placed by an investor can't be quoted at a previous net asset value price, and must instead be given according to the next computed net asset valuation.

Source:
a. http://www.investopedia.com/terms/f/fowardpricing.asp b. http://hubpages.com/hub/Unit-Trusts

Selecting A Suitable Unit Trust Fund

Unit trusts offer investors a simple, a more convenient and less time-consuming method of investing in a diversified portfolio with as little as RM500 than trading individually. But selecting the right funds is never easy. To begin, there is a wide array of unit trusts funds available in the market that investors need to understand first before investing. Amongst them is the Equity Unit Trust Funds, one of the most popular scheme that provides exposure to companies listed on Bursa Malaysia (and some overseas share markets). Fixed Income Unit Trust Funds are invested mainly in Malaysian Government Securities, corporate bonds and money market instruments such as bankers' acceptance and fixed deposits. The objective of a fixed income (or bond) unit trust funds is usually to ensure consistent income flow rather than capital growth.

Money Market Unit Trust Funds, meanwhile invest in low-risk money market instruments that are in effect short-term deposits of banks securities, with less than 90 days maturity. The money market unit trust fund is, therefore, highly liquid and ideal for use as a short-term strategy for investors to park their savings. In addition to the above funds, there are other funds such as the Government Sponsored Unit Trust Funds and the Syariah Unit Trust Funds, which invest in a portfolio of 'halal' companies, Islamic Debt Securities and bonds or other securities in accordance with Syariah principle.

Apart from these traditional funds, some new investment products have also emerged. These includes the Real Estate Investment Trusts (REIT), a defensive investment tool based on its stable returns from investing in real property, and the Exchange Traded Fund (ETF), which is an open-ended investment fund that tracks the index of a particular market or sector.

Next, investors would need to evaluate a few general considerations that help the selection process. The first consideration involves identifying investment goals, which may involve planning for retirement, setting up children's education fund, preserving capital, or simply earning income for the present. The second consideration would involve determining the appropriate investment horizon, or the number or years available for investing that would help achieve one's financial goals. Time horizon is important in influencing what assets to invest in, how much the investment can grow and how much risk to tolerate. The goals set and the investment horizon, partly a function of one's age, would play a major part in the selection of an appropriate fund. For example, a person in his early twenties, wanting an early start on a retirement fund, would be interested in a fund that emphasized capital growth rather than current income or liquidity.

One other consideration is determining the degree of risk tolerance. Like any other investment product, unit trust has also its own elements of risks. Funds that aim to deliver higher returns would normally be accompanied by higher risks. The appetite for risks should differ, depending on age, financial situatuion and any other alternative investment holding. For example, a younger person may take more risk for long-term gain as compared to a person who will be retiring soon.

After determining which category of funds to invest, it is important to analyse the prospectus for each funds selected. Some general factors to consider include the track record, the investment style and the cost structure of the funds. One important point to nite is that investors, when selecting a fund, can be easily swayed by the funds' historical investment performance. Past performance does not reflect future returns and therefore should not be the primary determinant, though it may be used as one of the factos in selecting the type of fund to be invested.

In reviewing a prospectus, one should pay close attention to the following items. First, investors should look at the fund's investment objective, whether the fund's goal is to maximize dividend income, maximize interest income, earn short-term gains, seek long-term caiptal growth, etc. Second, the fund's profile, which contains a sypnosis of the main attributes of the funds, such as a description of the fund's investment objectives and the strategies (the types of securities the fund invest in) that it employs to realize its objectives should be looked at.

Third, investors have to analyse the risks involved in investing in a particular unit trust and decide whether they match their own risk profile. Fourth, investors should be clear on the fees charged the same type of fees or the same level of fees. Next, investors should study the procedures for subscription, redemption and the switching of units carefully. And finally investors should look out for any specific features and constraints that may be in conflict with their investment goals, as some funds may have a policy of not distributing dividends, may require higher minimum investment requirement or may have procedures for buying or selling units that are somewhat restrictive.

However, making the right decision on the appropriate investment to meet one's investment objective and risk profile is not enough. The selection of a unit trust adviser with the necessary resources, experience and skills to manage one's investment is crucial. After investing in a fund, its performance needs to be closely monitored. Regular investment or the practice of dollar cost averaging is strongly encouraged. Over time, investment strategy and objectives should be continuously evaluated and adjusted. As an example, a person nearing retirement may consider moving money from growth funds into fixed income funds that provide current income and greater stability.

Source: Article from www.mier.com.my (Malaysian Institute of Economic Research).

Vital guide for unit trust fund investors

Many do not realise that the annual report that they threw into the bin is about their own money

HOW many times have you thrown away an annual report into the dustbin the moment you receive it in the mail? Many do not realise the document that they threw out is about their own money.

In a previous article, we had highlighted some of the important elements of a unit trust fund’s prospectus. Now that you have familiarised yourself with the prospectus, it is time to move on to another important document every potential and existing unit trust fund investor needs to look at – the annual report. Most people have the misconception that when they invest in unit trust funds, having a group of paid professional fund managers to manage their money gives them the licence to pay less attention to the performance of their portfolio.

The practice is usually different when people invest directly in individual stocks, whereby investors tend to constantly and closely monitor their shares. Unit trust investors tend to hold their units for a longer time period and only look at the price when they want to sell their holdings. Some may even simply invest based on advice from friends or agents without fully understanding the nature and risks behind the trust funds that they have invested in. When they receive the unit trust annual reports or interim reports, more often than not, the reports will be treated like old and forgotten textbooks. Don’t let them gather dust on your bookshelves, read them!

The annual report -- how to read it
The Securities Commission, via its Guidelines on Unit Trust Funds, requires all unit trust companies to send their annual and interim reports to unitholders within two months after the end of the financial periods covered by the reports. Information in the annual reports is vital to both existing and potential investors. The nature of an annual report for a unit trust is the same as that of a company. It basically tells you how the fund has performed over the past year. As an existing investor, this is important because knowledge of the asset mix and fundamentals behind the trust fund can help you decide whether to continue holding the units or sell them.

If you are a potential investor, you can find detailed information on a unit trust fund’s financial performance compared to a higher level of information presented in its prospectus, which will be useful in making your investment decision.


What can you find in an annual report?
An annual report will typically contain information on how the fund has performed — it will detail out the financial information of the portfolio, investment changes and the report from the manager.

Manager’s Review and Report

An annual report will start with the manager’s review on the past year’s performance of the overall market. This will cover the performance of the individual sectors related to the fund’s portfolio. It then moves on to provide a high level summary of the fund’s performance measured against its investment objective and relative to its benchmark.

As an investor, your interest will lie in how the investments in the past years have been carried out and whether they are in line with the fund’s stated investment objective. For example, if a particular unit trust fund’s focus is supposed to be on income, then the portfolio’s assets allocated to various sectors should reflect similar characteristics. This is important to ensure that the risk and return characteristics of the actual investments are consistent with the portfolio’s objective.

Financial Highlight -- NAV/unit

Under the section of financial highlights, the fund’s performance in terms of net asset value (NAV) attributable to unitholders for the report’s financial period will be compared to previous year’s results. This is a direct measure of the fund’s unitholders’ value, which indicates the appreciation or depreciation in the fund holdings which are still in the “open” positions.
Here, what you are obviously looking out for is an improvement from the previous period. Do not get shocked if you discover that the fund you have or intend to invest in shows an inferior result in the 2008 financial year. When you start comparing the result for 2008 against 2007, you will have to account for the impact of the global financial crisis on last year’s performance. This will not be something that is exclusive to your fund alone, as most funds will very likely indicate the same.

Total Returns

A more meaningful way of measuring a fund’s performance is to compare it to its benchmark. One of the performance indicators used to compare to the benchmark is the fund’s total returns. The fund’s total return for the period, expressed as a percentage, includes the fund’s income received and capital appreciation from investments of the portfolio. The formula to calculated total return is:

Total Return % = [Income received + (End of period Fund value – Initial Fund value)]
Initial Fund value

The comparison of actual portfolio performance relative to the fund’s benchmark will serve as an indicator to investors on the relative performance, whether it is at par, above or below its benchmark. For example, if the total return for the fund is -5 per cent while the fund’s benchmark total return is 1 per cent, then the fund is said to have underperformed the benchmark by 6 percentage points. When the performance deviates from the benchmark, then the management should provide the reasons for the deviation. If it is mainly due to the implementation of management strategies and if the performance is significantly below, then the investors will have to be more cautious.

Here, investors will need to question whether the fund manager is well equipped and competent enough to implement the strategies they have in place. The fund may have deviated from its original investment objective, resulting in the exposure of the portfolio to unnecessary risks. Under such circumstances, investors should then evaluate whether the fund is still consistent with their own investment objectives and reconsider the suitability of holding the units. Other than looking at the financial performance for the period, you should also look for the fund’s performance over a longer time frame. For funds that have existed for more than a year, you will also find the financial performance shown for the past three or five years.

As we are all aware, the performance for a particular year, such as 2008, may be subject to certain one-time market events like the global financial crisis. One year’s less than stellar performance will not be an accurate reflection of the fund’s performance. Performance shown over a longer time period will be more representative of a fund manager’s skills and ability in adding value to the fund. However, always bear in mind that past performance is no guarantee of the future achievements of any particular fund. Hence, never base your investment decisions solely on past performance without learning other essential facts about the fund.

Now, picking up an annual report to study your future or existing unit trust fund seems easy, right? Be mindful though, this is just part one of this article. We will continue to explore more on the annual report next week.

The article was written by Securities Industry Development Corporation (SIDC) to educate investors on smart investing. The information provided is for educational purpose only and should not be used for legal or other professional advice.
SIDC, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.

Unit Trust Investing Tips

1. Getting the right mix
How do you tell the risk/return dimensions of a fund? "Look at the beta (historical measure of the fund's volatility in relation to the overall market) and Sharpe ratio (historical measure of the risk-adjusted return of the fund) of the underlying funds," says Wadia. This information can be found in the fund fact sheets as well as Bloomberg and websites like fundsupermart.com. "One of the ways to determine the correlation of the funds - how much in synch they move with each other - is simply to compare 10-year price charts," he explains. Backtesting (evaluating historic data) will show you how those funds performed, say, over a five or 10 year period, as a part of your portfolio, he adds.

For most people, though, the advice is to keep it simple. Although it is possible for you to simulate a portfolio of unit trust funds based on inouts like standard deviation and projected returns, says Pretta, it involves backtesting and thus, it is best to leave it in hands of the wealth management team. Avoid analysing data in an attempt to find the 'perfect' asset allocation, adds Wong. Besides that, past performance is insufficient to predict future risk-returns.

'It is sufficient to use model portfolios as guidelines to point you in the right direction," says Gan. He adds that, usually, a typical risk-profiler result can lead you toward a suggested unit trust portfolio allocation. Note though, that asset allocation models are generalised based on basic principles that are non-exhaustive. "As you arrive at an asset allocation, you have a second chance to think if you are really comfortable with, let's says, 60% in equities and 40% in bonds. Ask yourself whether you accept the allocation," says Pretta.

2. Look Beyond Asset Class
Diversification is not juts about different asset classes. Look at the fund manager of the fund as well, especially if you are choosing actively managed funds. You are, after all, paying the managers a feeto beat the market. "The skill of the manager would determine how well the chosen fund would perform. Different investing styles contribute the additional alpha (return in excess of the compensation for the risk borne)," says Dinesh Virik, executive director of Perkasa Normandy Advisers Sdn Bhd. Eric Wong, Hong Kong head of research for Lipper, a Thompson Reuters company concurs, saying that by looking at the alpha, one would determine whether the fund manager adds value to the fund. "A higher alpha shows that the fund manager has strong investment skills to manage his fund. This skill includes selecting securities and predicting the direction of the financial markets."

For a fund house that has a system in place and a few equity funds with the same benchmarks, the funds are likely to have the same investment universe, says Pretta. "It is a better option to diversify across fund houses for the same categories of fund."

3. Managing Your Portfolio
If you think investing in unit trust funds means that you don't have to do any work, that you can buy the units and forget them, think again. That's not a strategy, says the experts, even if the fund managers are actively managing the funds' asset allocation. "It is imperative that the individual (or a qualified adviser) manages his investment portfolio," says Wadia. "The reason for this is that a portfolio of unit trusts should be viewed as a collection of unrelated funds. Each fund, though professionally managed, has no correlation with the other funds in an investor's portfolio. This is why each fund should be considered as a separate investment, and as such, the investor must be aware of how much of his portfolio is allocated to each particular investment, and why."

Over time, inestments such as unit trust may become less attractive (due to valuation reasons - overpriced perhaps, or due to quality reasons - low growth prospects), adds Sam. "At the same time, other funds may become favourable and worth including in your porfolio. Besides, the investor's own needs and risk profile can change with circumstances. That is why the management of a portfolio is critical to ensure sufficient growth over the years."

It isn't enough to just hold one fund and let the fund manager handle the asset allocation, says Pretta. "An investment portfolio which, by definition, should comprise all assets owned by an investor, should include different asset classes such as bonds, equities, property and other alternative investments. In selecting a single mutual fund, albeit a mixed or balanced one, the investor is reliant on a single fund manager's capabilities, which limits the benefits of diversification."

There are two main approaches to the asset allocation of your own portfolio. Strategic asset allocation is about fixing you asset allocation; for example 60% equities, 40% bonds / irrespective of the market conditions, and requires a disciplined approach. "You would take a long-term view in this systematic strategy," says Wong. Tactical asset allocation allows you to take a view of the future - and is premised on the notion that valuations of asset classes are an important consideration when deciding weightings in your portfolio. "You make calculated moves by deviating from the original mix in order to capitalise on unusual or exceptional investment opportunities," says Wong. "For example, if you think the market is bearish, though your original asset allocation is 60% in equities (aggressive) category, by using the tactical approach, you cut your equities category to 30%. However, over time, you return to your strategic mix of 60%."

Lee gives an example, "Let say you had an allocation of 70% in equity funds, 20% in balanced funds and 10% in income funds in 2007 (when it was a bull year). In a declining market in 2009, you should have an allocation of 20% in equity funds, 30% in balanced funds, and 50% in income funds. However, in a recovery market in 2009, it should be 50% equity, 30% balanced funds and 20% income funds." Tactical allocation, however, has its critics, who say that it has an element of market timing, something notoriously difficult for investors. John Bogle, founder of giant Vanguard, said in his book, Common Sense on Mutual Funds, that if you choose to adopt tactical allocation, limit the deviation from your strategic allocation to 15%. So, if your strategic allocation were 60% in stocks, making tactical moves would bring you to 45% at minimum or 75% at maximum.

Yet a third allocation model is referred to some as dynamic asset allocation, in which the allocation changes on a move frequent basis. Even if you are adopting a strategic approach, experts favour reviewing your portfolio at least once a year. One practice recommended is rebalancing. When you have an imbalanced portfolio (your investment has deviated from original allocation), says Sam, you are favouring the winner over 'less optimal' performing funds. "The new portfolio may no longer reflect you tolerance for risk. The sharpness of any subsequent losses that occur can leave one surprised. You may regret not taking steps to fix the problem when you once had the chance." On the flip side, with the fall of the equity markets, you equity portion may have dipped to much lower levels. If you can stomach the risk, rebalancing combined with the strategic allocation approach would make you buy in at lower prices.

Benjamin Graham (author of The Intelligent Investor and Guru of Warren Buffet), suggested that rebalancing should be carried out every six months. This is when you fixed a time interval, says Wong. "It is also possible to look at variants, such as if your actual portfolio allocation moves 10% away from the set target or by looking at the market. For example, the (KL) Composite Index moves by 20%." A disciplined rebalancing process prompts you to act when changes in your portfolio require action. However, don't be obsessed with rebalancing. "Only rebalance when there's a need to do so. Don't be preoccupied with rebalancing and end up 'trading'," says Pretta. Hence, only move you investments when you believe market dundamentals have changed. Otherwise, don't get caught up with investor sentiment," says Gan.

Source: Personal Money magazine, February 2009

Fund Fever & The Remedy

Problem 1: Your portfolio is wrong for your risk profile
When times are good and markets are expected to rise, some investors can be over-aggressive, believing that they are taking little risks. It is when the market falls that they realise they do not have the stomach for that kind of risk.

Remedy > To sustain a satisfying portfolio, says Wong, it is important to review and assess the original reasons for its construction; and re-look the assumptions made. If you are panicking because the fall in your high-risk investments means that you are short of funds to pay for your basic and emergency needs, it's time to look at your invested amount, and if it is invested in the right assets? The first step in building your portfolio is to take a look at your total net worth (the difference between the total value of your assets and total value of your liabilities). This will help you to manage your money better and understand the impact of your financial decisions, and reduce the chances of your portfolio becoming redundant after your plan is put forward.

For instance, says Sam Wadia, and investment trainer and a Monetary Authority of Singapore-licensed financial consultant, if you need insurance protection, implement it first, so that your investment account is not jeopardised should an undesirable calamity, like an accident or an illness, occurs. "You need to determine the proportion of your entire net worth that you would like to put into investment products. From there, you determine specifically how much would go into unit trusts," says Gary Gan, general manager of business development & marketing, Pacific Mutual Fund Bhd.

Second, how are your funds spread out? Asset allocation is a strategy that aims to balance risk and reward through distributing investments among different asset classes. If your portfolio is wrong for your profile, you just have to adjust it, says Pretta Mehrotra, head od research with Perkasa Normandy Managers Sdn Bhd. "Go back and start at the beggining. If you can do some switching to save costs, you should."

Mike Lee, financial planner and managing director of CTLA Financial Planners Sdn Bhd, says investors who can stomach a little more risk than what their risk profile says can opt to keep some of the equity funds. "This may work out, especially if it's a good fund and will also save you some cost." Note that you can also tweak the risk by switching within a fund category. For example, it is riskier to put more funds in small-cap funds than in big-cap ones. "Although they are closely correlated in terms of asset class diversification, the extent of the fall/rise in their values is different," says Wong.

Problem 2: You have too many funds
As fund houses introduced more funds, you may have been tempted to snap them up. Any fund that seems slightly different from what you already have in your stable sounds good - after all, it;s all about diversification, right?

Remedy > There is such thing as over-diversification, says Pretta. "Over-diversification does not have benefits. Let's say you have RM10,000 and you're diversified into five funds, which means a small exposure in each. That, is some sense, is over-diversification, because nothing is going to make an impact. Rebalance and be sensible." Depending on the investment amount, the optimal diversification range is five to 10 funds, says Wadia. To select the right type of funds, you must have access to a broad enough universe that only ine fund fits your entire portfolio, opiness Gan.

Wong suggests investing in five asset classes - equity, money market, real estate investment trusts (REITs), bonds and commodities. "Try and find a characteristic in the fund that is negatively correlated to whatever funds you already have." To simplify things, Lee says: "If you want a property fund, pick a global fund that would cover everything. Then there is no need to buy China or European property funds because they are all in the same asset classes."

To cut down on the number of funds, look at those that are not performing well and/or are in the wrong sectors at the moment, says Lee. "Rebalance, switch within the same fund house or sell it and redeploy the funds into asset classes. Although this (current market) is unusual situation where most sectors look bad, there are promising ones like precious metals, where the bulk of that would come from gold mining companies."

Problem 3: Your portfolio has taken a dive
If you find that your funds are tanking, they aren't the only ones. According to the Lipper Malaysia Fund Market Insight Report last December, funds registered for sale in Malaysia incurred an average loss of 22.28% for 2008. A lot more uncertainty lies ahead. In difficult investing environments like this, what do you do?

Remedy> There are four strategies you can employ in times like these, depending on your risk appetite, says Lee. "Either sell your units, switch to money market funds, dollar cost average or continue holding till things get better again." Selling means protecting the funds from further losses, but it also means that you don't enjoy the comeback if stocks rebound. Investing more means that you could reduce the cost of your investment, but if the market continues its downturn, returns will be affected. Retaining the status quo means that you are depending on the market's whims to recover the losses you have already suffered. Which do you do?

The key to portfolio success is having a plan and taking action. First, keep in mind that the past is the past. Next, examine your personal situation, risk profile and investment horizon - can you stomach more volatility this year? If you can't and need the money this year, get out of the market. However, if you don't need the money, riding through it (the volatility market) can be a possibility, says Pretta, more so if you back what you've lost in the short term. If you have some cash to spare and think the funds you're holding are good investments but they are just victims of the market, you can opt to average down. Either ride it through for the next five years or get out."

Ideally, you would have been managing your portfolio and you would have already switched to a more conservative stance. but if you have held on to your equity funds, with the market down by more than a third in the past 12 months, selling has its risks. If the market improves, selling now means locking in losses and selling low instead of buying low. "If you did not take action at the end 2007, it might be too lateto make any adjustments," says Lee. "If you're not able to switch from equity to a more conservative fund and you find that the fundamentals of your equity fund is still good, the next best action to take would be to dollar cost, especially if you have surplus funds. To dollar-cost means that you are investing at a price (of a fund) that has dropped but believe that the fund is still good for your portfolio."

If the economic situation has changed the fundamentals of a fund, it may be timely to reasses its longer-term viability. Lee says to look at the market, clean up your portfolio, and identify the funds that do not have potential. "Switch some to money market funds temporarily. However, retain about 15% to 20% of your portfolio in equities," he says. For those who are looking to buy more funds to take advantage of the low prices, Lee recommends exchange-traded funds or tracker funds.

"If you have a choice to accumulate buy funds that are passive, don't have upfront fees and don't depend on stock-picking. These funds are looking attractive and will beneft from the first wave when the market rebounds."

Source: Personal Money magazine, February 2009

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.

Risk Associated With Unit Trust Funds

There are many possible outcomes associated with an investment and all investments involve some degree of risk. Different classes of assets generally exhibit different levels of risk. It is important to note that it is not always possible to protect your invesments against all risks, as events affecting investments cannot always be foreseen. When investing into unit a unit trust fund, one should be prepared to accept some level of risk and should consider the following risks:

a. Market Risk – The risk of fluctuation in the performance that affect the prices in a particular market. The risk factors such as political change, economic and financial market climates, fluctuations in the interest rate, overseas capital market performances, fiscal policies of the respective countries and inflation will shape the movements of the values of the underlying instruments in the investment portfolio. This will cause the NAV or prices of unit to fall as well as rise.

b. Management Risk – The securities selected by the investment manager may perform better or worse than the overall stock market or as compared to the portfolios selected by the competitors. As a result, lack of knowledge, experience, expertise and poor management techniques may result in an adverse impact on the performance on the fund and thus, the investment to unit holders.

c. Liquidity Risk – Liquidity risk is define as the ease with which a security can be sold at or near its fair value depending on the volume traded on the market. The various securities that are purchased by a fund may encounter liquidity risk. Liquidity risk relates to the fund’s ability to quickly and easily trade, at a reasonable price, in and out of positions. Should a fund comprise a security that has become temporarily or permanently illiquid or difficult to sell, the investment manager may need to sell the security at a discount to its fair value, which eventually affects the fund’s value.

d. Inflation Risk – Ideally the purpose of any investment is to secure returns that are greater than the inflation rate. While a fund will constantly seek to maximise returns and exceed inflation rate, it may occasionally experience losses, which result in returns that will not keep pace with inflation in the short run.

e. Stock or Bond Market Risk - For a unit trust that has stocks or bonds in its portfolio, fluctuations in the market performance due to factors such as fluctuation in interest rates, changes in economic climate, political and social environment that will affect the stock or bond market as a whole, will also affect the value of investment either in a positive or negative way.

f.Interest Rate Risk – Debt securities and fixed interest securities are sensitive to movements in the interest rate. Interest rate fluctuations may be attributed to market risks that affect the level of risk free rate. A rise in the general level of interest rates may result in a decline of the value of debt securities and fixed interest securities. This would lead to a decrease in the bond fund’s NAV. Fluctuations in interest rate that affect the general market may also have impact on the Syariah bases fund. A rise in the general level on interest rates may have an effect on the rate of returns of Islamic debt securities. This could cause the decline of the value of the Islamic debt securities and the fund.

g. Compliance Risk – This is the risk that the manager and others associated with the scheme will not follow the rules set out in the scheme’s constitution and internal policies, or the law that governs the scheme, or will act fraudulently or dishonestly. However, this risk is greatly reduced via stringent internal controls and constant cross-departmental checking employed by the manager. In addition, a yearly or any unscheduled internal audit exercise will be conducted to check any compliance matters that might have been inadvertently overlooked by compliance department. The presence of the trustee whose duty is to ensure that the fund’s investment mandate is complied with will further add to the reduction of such risks.

h. Loan Financing Risk – Investors who take end-financing loans to purchase units in a unit trust fund must be prepared to accept gearing risks as the prices of the units can go down as well as up. The investor may be required to top up the difference in the event the unit price goes below the margin of advance.

g. Credit / Default Risk – Credit risk refers to the possibility that the issuer of a fixed income security or bond may not be able to make interest payments or repay the principal in a timely manner. This will translate to losses that will reduce the value of a fund.

i. Currency Risk – Currency risk is also known as foreign exchange risk. It is risk associated with investments that are denominated in foreign currencies. When the foreign currencies fluctuate in an unfavorable movement against Ringgit Malaysia, the investments will face currency losses in addition to the capital gains/losses. This will lead to a lower NAV of the fund.

j. Country Risk – It is a risk associated fluctuations in foreign securities due to changes in the country’s economic fundamentals, social and political stability, currency movements and foreign investment policies. These factors may have an impact on the foreign investments portion of the fund and the prices of the securities that the fund invested in.

Source
i. http://www.arutm.com.my/The%20Basic%20of%20Unit%20Trust.pdf
ii. http://www.ambmutual.com.my/risk.htm