by KCLau, in investment
Are Unit Trusts Lousy Investment?
Before you read this post, make sure you had read this:
Why Mutual Funds Are Lousy Long-Term Investments
I couldn’t agree more with the article. For your information, I am a big fan of Robert T. Kiyosaki. I read most of his books.
The article concludes that “are you an active investor or passive?”.
If you are an active one, unit trust is really not your piece of cake.
If you are a passive investor, is there any other better choice than unit trust?
Besides the initial 3-7% service charges which most contribute to the consultant’s commission and incentive trip for agent, there is trustee fees and management fees charged every year and calculated daily. Unit trust company earn big portion from the management fees – normally 1.5% p.a. depends on fund type.
In order to make better gain and profit, unit trust company must increase their fund size or asset under management, which is through:
1. increase fund size by making more sales through their agent force.
2. launch new fund to attract more investors.
3. make sure the existing fund grows with proper investment strategy.
I consider it i a win-win situation. When the funds appreciate, investor wins with higher return, unit trust company also wins because they can earn more management fees.
It is true to say that unit trust company makes more but the investor contribute the capital and bear all the investment risk. Let’s think about McDonald for a minute. McDonald is a very profitable company, while franchisee contribute the capital and bear all the investment risk, even the consumers bear the health risk! All businesses should make big profit, don’t you agree?
What do I look for in a unit trust fund?
1. No up-front charges or service fees.
2. Remuneration to agent based on a certain percentage of the fund’s return which is realized through switching or repurchase.
3. No need to pay remuneration to agent/unit trust company if my investment is making a loss.
4. Provide easy online switching and repurchasing service so I don’t have to trouble the agent to meet me just for my signature!
As I know, there is no such unit trust fund in Malaysia. But I wish that it will be available soon in the future.
The secret of investing in Unit Trust
There are 3 common strategies used in unit trust investment.
1. Ringgit Cost Averaging
Regularly invest a fix amount in a unit trust fund regardless of market trend is called the Ringgit Cost Averaging strategy. The actual market performance is fluctuating. When the equity market is high, you buy less unit with the same amount. When the market is low, you buy more unit. For long term, you will get much more unit in the lower price range.
2. Portfolio Re-balancing
Portfolio re-balancing is the process of bringing the different asset classes back into proper relationship following a significant change in one or more. More simply stated, it is returning your portfolio to the proper mix of stocks, bonds and cash when they no longer conform to your plan.
Example:
You start investing 50% in equity and 50% in fixed income fund.
1 year later, the equity rises and now your portfolio consist of 80% equity and 20% fixed income fund.
To re-balance your portfolio, you should sell 30% of your total fund in equity and invest it in fixed income fund so that the portfolio is maintained.
This is the simple principle of buying low, and selling high.
3. Switching
Switching will lock in the gain you made in your unit trust investment. Switching fees are low and definitely lower than the upfront service charge. When you are making profit from an equity fund, you can switch it to some lower risk fund to lock the gain instead of selling it for cash. When the market turn low, you can switch it back to equity fund.
From Squidoo
