Despite the barrage of publicity on unit trusts, we still encounter a lot of confusion and misinformation among investors. In the next two articles, we would want to clear some of these issues. In this article, we will tell you if unit trusts are suitable for you and how you should approach unit trust investing.
What are unit trusts?
To understand whether you should be buying unit trusts, you need to know what they are. Simply, unit trust is the pooling of money from investors with shared investment objectives. The money is then invested by full time professional investment managers according to the trust’s mandate.
The benefits of unit trust are numerous. Firstly, for small amounts of as little as RM1000, you get to have access to the services of professional investment managers and the investment research facilities, materials and information available to them. Secondly, for the same small amount, you get proper diversification. Thirdly, the whole process is much less stressful than investing the money on your own as you do not have to do the research, settlement and transaction necessary in direct stock investing.
Unit trusts are not a vehicle for punting or to make quick profits.
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Are unit trusts suitable for you?
Not all people should buy unit trust. Firstly, if you have over RM2 million to invest, you could consider using the services of asset managers. Your money would not be pooled, which means the money could be managed in a manner precisely tailored to your financial needs. Also, the expenses are usually less than unit trusts. Secondly, if you have at least RM100,000 to invest and you think you can do better than professional investment managers and have the time to do your own research, you may want to consider investing some of the money directly in the stock market.
Most people do not fall into either of the above categories. Therefore, unit trusts are suitable for the vast majority of people who need to have a cost effective, professionally managed way of saving and investing and one which would not require much of your time and effort.
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Knowing yourself
Realising the need to save and invest is the first step in unit trust investing. To know which unit trust to buy, the answer is actually to know yourself first. Ask yourself the following questions:
• What are your investment goals? Are you investing primarily for capital growth or would you need some regular income from your investments?
Different unit trust funds have different investment objectives that roughly cater to each of these goals. Make sure your financial goals are in line with the funds’ objectives. Rank your financial goals in order of importance as this will help you better prioritise when determining which fund to invest in.
• How long can you invest in the funds?
If you have a long-term investment horizon of eight to 10 years and beyond, you should consider growth funds that have higher performance volatility but provide greater potential returns. With a longer time horizon, you would be able to ride out the often unpredictable short to medium-term market volatility. However, if you have a shorter-term goal of two to three years, a bond fund, balanced fund or a combination of both would be more suitable.
• What is your appetite for risk?
All investments involve some risk of loss of capital possibly due to changes in the economic or political environment, interest rate and currency fluctuations or inept corporate management. These result in constant fluctuations in value of investments. Bear in mind that generally the higher the risk, the higher the potential return. Would you sell your unit trust funds when it starts to lose 30% or more of its value due to shorter-term market events even though you do not currently need the money? If you are less apt to be fazed by such market drops and general volatility, you could invest more in funds with higher equity exposure.
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Narrowing the field
Answering the above questions greatly narrows the choice of unit trusts. For example, a typical person in his 20s has a long investment horizon of 20 to 30 years. He will probably need to save for a house and his children’s education. The unit trust funds he should be investing in range from balanced funds (maximum 60% equity exposure) to growth funds (up to 100% equity exposure). The choice between balanced or growth funds would depend on his risk appetite.
A contrasting profile would be someone in his 60s. He has a somewhat more limited investment horizon and would probably need to draw down on the money for his retirement. In this case, he should be conservatively invested in bond funds or income funds with a small equity exposure of about 20%. Both types of funds would generate an income stream for him to use while largely preserving wealth for his near term needs. The small equity exposure is to ensure that a portion of his portfolio has the potential to appreciate in value to keep up with rising living costs.
In spite of the abundance of funds available in Malaysia, about 175 funds in all, knowing yourself would narrow the available choices to no more than 20 to 30 funds. However, bear in mind that your objectives, investment horizon and risk appetite can and do change over time. Hence, it is good if you reassess your profile at least once a year and change your portfolio accordingly.
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Where does one obtain information on unit trust funds and on investing?
To further narrow the choice of funds, you need reliable and preferably unbiased information on unit trusts. Some important sources of such information include:
• The Prospectus:
The unit trust manager publishes a prospectus yearly. It is a good source of information for learning more about unit trusts and the funds that you are interested in. The prospectus contains vital information on the objectives and strategies of the funds, the fees and charges involved, specific risk and returns of the respective funds and the investment options available to the investor. The prospectus also provides the qualifications and experience of the team of people managing your funds and the financial standing of the unit trust company.
• Annual and interim reports:
These reports include a summary of the fund’s performance, an explanation of the economic and stock market situation in the period concerned and their outlook. The reports also include a full list of the Funds’ investments as at the report date. These reports provide additional information not found in the prospectus.
• Fund performance tables:
The above two publications would give you the background information of unit trusts. To make comparisons among different unit trusts, you need independent rating agencies such as Lipper Asia Limited and Standard & Poor’s Micropal, which compile regular performance rankings and fund ratings for all Malaysian unit trusts for various periods. Unit trusts are placed into respective groupings based on investment objectives and strategies and are ranked by performance. Although past performance is not a predictor of future returns, it does give some idea of how a fund would perform in various time periods and compared to other similar funds. The fund ratings and performance rankings would also help you further narrow your fund choices.
Next Steps
Going through the above will narrow the field to a handful of potential unit trust funds in which to invest. In our next article, we will show you what to look for in a unit trust company.
