Your Benefits With Unit Trusts

Professional Investment Management

A unit trust combines the capital of many investors to employ experienced management in purchasing securities of many companies. The management of a unit trust provides diversification of investments and supervision which few investors could individually afford. Investment management is a full time job which requires specialised knowledge and training.

The most common investing strategy employed by fund management companies is a combination of the ‘top-down’ approach, ‘bottom-up’ approach or a combination of both. The top-down approach takes into consideration factors such as macroeconomic outlook, the current business cycle, interest rate trends and other economic factors. Meanwhile, the bottom-up approach, also known as stock picking, looks closely at the fundamental strengths of a company based on management credibility, financial track record and market share. For fixed income securities, the key factors are credit quality, interest rate risks and managing the bond portfolio’s exposure to changes in interest rates.

Diversification

Diversification involves the process of spreading risk over a broad portfolio of stocks and bonds in different companies, sectors, countries or regions. This can only be done with substantial amounts of monies to buy a wide variety of stocks.

Unit trusts facilitate the diversification process by providing small investors with an avenue to pool their savings for the purchase of a diversified portfolio of stocks and/or bonds that will bring higher potential returns at lower risks to unitholders compared with investing directly in stock markets.

Liquidity

Unitholders may redeem all or part of their units on any business day and the unit trust management company will be obliged to purchase them. This means unit trusts come with high liquidity whereby they can be readily converted into cash. In fact, the Securities Commission requires that investors must receive their monies within 10 days from the receipt of the repurchase request by the fund management company, and the value of the redemption will be based on the price determined at the close of the business day in which the request for redemption is received.

Advantages of Compounding

Many unit trust funds provide facilities for investors to reinvest their distributions. For those who opted for distribution reinvestment, the fund will automatically credit the distributions into the account, rather than sending distribution warrants. This process of reinvesting the income from the original investment and also of reinvesting the return on the total accumulating investments is called compounding.

To illustrate, let’s say you invested RM100 at the beginning of every month at 25 with an interest growth of 10% per annum. By age 65, your investment would have grown to RM638,000! The key element to compounding is time - the longer the period of time, the greater the growth.

Regularity of Investing

Many people do not have substantial sums of cash available to invest, but they can develop an investment account by investing smaller sums regularly in a unit trust.

Most unit trust funds have plans available to make it possible for smaller investors to invest relatively small amounts monthly. It is easy and inexpensive for an individual to acquire units through deposits of RM100 or more a month in a unit trust fund.

Fund Administration

Few people have the experience, time or facility to properly set up an investment programme, much less to supervise it constantly. Unit trust managers are professionals who are devoted to solving the investment problems of people from all walks of life.

Unit trusts relieve their investors of the need to handle their own securities transactions. Investors in unit trust funds are not obliged to concern themselves with matters such as:

1. Obtaining quotations on securities being bought and sold

2. Delivery and payment for the securities involved in each transaction

3. Safekeeping of cash and securities

4. Accounting and bookkeeping procedures, etc

Investors of unit trust funds will receive interim and annual reports which describe:

a. The portfolio of the funds

b. Investment changes made in the period

c. Distributions paid, if any

Sources from : http://www.publicmutual.com.my/article.aspx?id=87

Secret of Investing 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.

Introduction: Unit Trust

A unit trust is a financial vehicle through which individuals may invest their money. The idea behind unit trust is better returns through collective investing. In other words, it means pooling the investments of many investors, individuals and institutions.

Investing in a unit trust offers investors numerous advantages, including:

a. Professional management at a low cost

b. Safety through the spreading of risk (diversification)

c. Liquidity

d. Ease of transaction

e. Capital appreciation/income stream

The operation of a unit trust may be best explained by outlining its similarities with the operation of a bank. Many individuals deposit money in the banks, for which they receive interest. These individuals expect complete liquidity where they are able to withdraw their deposits in cash at any time. The banks employ professional managers to look after the deposits, which are invested. These managers lend the deposits to other individuals requiring funds and a host of other profit generating facilities of the banks.

Similarly, unit trust holders wish to put their money to generate higher returns. The goal of all investments is to make money work harder, either through producing income or growth. Unit trust holders have liquidity because their units can be readily converted into cash at any time. By investing in unit trusts, it allows them to engage professional fund management companies at a low cost to the individual investors. These management companies diversify the investible funds in many different securities and other approved channels to spread the risk.

The unit trust is constituted through a document known as a Deed which brings together and binds the various parties to the deed:

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The trustee, who holds the assets of the trusts on behalf of the unitholders.
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The management company, who is the promoter of the scheme and provides investment and administrative expertise as well as markets units to the public.
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The unitholders who provide the funds for investment and expect to receive the benefits derived from the investment. The effect of dividing the beneficiaries' interest in the trust into units is that their interest is quantified into discrete portions.

Particular advantages of unit trusts over the pooled investments include:

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The provision of an independent trustee to hold the trust's assets on behalf of unitholders and to watch over their interests on an on-going basis.
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The deed and prospectus are scrutinised by government authorities, prior to an offer of units being made to the general public. The management companies and trustee are themselves approved by the regulators.
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A buy back provision or covenant in each deed which requires the management company to redeem an investor's units within a specified time limit at a price determined in accordance with the deed.
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Provisions in the deed under which the management company and trustee are in a fiduciary position in relation to the trust (i.e. they can only profit in ways laid down under the deed). The investor can determine in advance what costs and charges they will be required to pay to join and stay in the trust.

Source from: http://www.publicmutual.com.my/article.aspx?id=86

Dollar Cost Averaging

Dollar cost averaging is a timing strategy of investing equal dollar amounts regularly and periodically over specific time periods (such as $100 monthly) in a particular investment or portfolio. By doing so, more shares are purchased when prices are low and fewer shares are purchased when prices are high. The point of this is to lower the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time.

Dollar cost averaging is also called DCA and constant dollar plan in the US, pound-cost averaging in the UK, and by the currency-neutral terms unit cost averaging and cost average effect.

Parameters
In dollar cost averaging, the investor decides on three parameters: the fixed amount of money invested each time, the investment frequency, and the time horizon over which all of the investments are made. With a shorter time horizon, the strategy behaves more like lump sum investing. One study has found that the best time horizons when investing in the stock market in terms of balancing return and risk have been 6 or 12 months.
One key component to maximizing profits is to include the strategy of buying during a down trending market, using a scaled formula to buy more as the price falls. Then, as the trend shifts to a higher priced market, use a scaled plan to sell. Using this strategy, one can profit from the relationship between the value of a currency and a commodity or stock.

Source from: http://en.wikipedia.org/wiki/Dollar_cost_averaging

What is Unit Trust?

A unit trust is a form of collective investment constituted under a trust deed.

Found in Australia, Ireland, the Isle of Man, Jersey, New Zealand, South Africa, Singapore[1], and the UK, unit trusts offer access to a wide range of securities.

Unit trusts are open-ended investments; therefore the underlying value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. Each fund has a specified investment objective to determine the management aims and limitations.


Resource: http://en.wikipedia.org/wiki/Unit_trust