PRINCIPLE 1: LEARN THE BASICS – UNIT TRUSTS IN GENERAL
What Is A Unit Trust And How Does It Work? A unit trust is a professionally managed investment fund which pools your money with that of many other investors with similar investment objectives. The aggregate sum is then used by the fund to build a diversified investment portfolio which comprises stocks, bonds and other assets in accordance with the investment objective of the fund. The price of a unit reflects its total Net Asset Value, commonly referred to as 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 day’s trading. Hence the fund’s unit price is quoted in major newspapers on the following business day.
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 and the Guidelines on Unit Trust Funds issued by the Securities Commission Malaysia. The manager is also required to appoint an approved 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.
What Are The General Benefits Of Investing In A Unit Trust?
Diversification – the spreading of risks over a wide variety of securities in different sectors. Normally to do this, you must have a substantial amount of money to buy a diversity of stocks. However, unit trust funds facilitate this by providing small savers with an opportunity to pool their savings to invest in a diversified portfolio of stocks or you could think of it as "not putting all your eggs in one basket".
Professional Fund Management – your ability to "employ" a team of well-trained, in-house investment professionals who conduct full-time regular investment research and analysis in managing the assets of the fund. With such investment expertise, research facilities and information network, sound investment decisions may be made.
Liquidity – you can redeem all or part of your units on any business day and the manager will purchase them.
Hassle Free – you need not trouble yourself with complicated decision making and arduous paperwork involved in investment in the securities market.
Affordability – you only need a small amount of money to participate in a professionally managed portfolio of investment and enjoy the same benefits accorded to others when investing in high priced securities. At the same time, you can also reap better returns from a portfolio of investment as opposed to the limited number of securities which one can invest individually.
What Are The General Risks Of Investing In A Unit Trust?
Market Risk
the portion of risk arising from changes in the economic, political and social environment and affecting the stock market as a whole. Even a well-diversified fund cannot avoid market factors when they are such as to simultaneously affect the prices of all securities irrespective of their sectors and prospects.
Specific risk or stock risk
the portion of risk which is unique to the company that issued securities. Specific risk can be associated with management errors, shift in consumer taste, advertising campaign, lawsuits and competitive industry conditions. The risk can be mitigated by diversifying the fund's investment over more companies in various segments of the economy which operate independently from one another.
Loan financing risk
the portion of risk which you must consider carefully when taking a loan to invest in unit trusts as borrowing increase the opportunity for loss as well as profit. If the value of your investment falls below a certain level, the bank may require you to reduce your loan balance. Also, your borrowing has an interest cost, which may go up and eat into any gains that your fund makes.
Management company risk
the portion of risk that the manager may not adhere to the investment mandate of the fund. However, this risk is greatly reduced by the presence of the trustee whose duty is to ensure that the fund's investment mandate is complied with.
Interest rate risk
Interest rate anticipation is the most critical factor in any active bond portfolio management strategy because it involves relying on forecasts of uncertain future interest rates. In the event of rising interest rates, prices of debt securities will decrease and vice versa. Meanwhile, debt securities with longer maturity and lower coupon rate are more sensitive to interest rate changes.
Liquidity risk
the portion of risk which is faced by a fund which trades in thinly traded or illiquid securities. Should the fund need to sell a relatively large amount of such securities, their selling price would be greatly lowered due to the selling pressure.
Credit/Default risk
causing a deterioration in creditworthiness, perhaps even a default in the payment of principal and interest.
Inflation / Purchasing Power Risk
the risk that the real rate of return from the investment (i.e. the return less inflation rate) is eroded by the loss of purchasing power due to inflation.
Distribution risk
it is not the policy of the manager to guarantee the investment returns or dividend payout to unitholders. In addition, the past performance of a fund is not indicative of its future performance.
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