Understanding Unit Trust Schemes

This is where an investor with a lump sum of monies invests into unit trusts. This may be the only investment the investor wishes to make. Over a period of time (3-20 years), the initial investment will increase as distribution and other income is earned by the fund. When redemption or sale of the units take place, the unit-selling price will reflect the accumulation and compounding of capital over the relevant periods. It is this compounding effect over time which makes accumulation type investments, such as unit trusts, so attractive to the investor.

For example, someone who has recently inherited a sum of money may wish to invest the funds into a unit trust and hold it for an extended period to save for some specific purpose. e.g. children’s education. At the end of the holding period, the proceeds of the sale of the units will be the initial investment plus the returns on that amount, accumulated over the period.

Some people invest in unit trusts by making regular (e.g. monthly) contributions to their fund. This is an ideal, disciplined and useful way to accumulate capital for a future need. By making regular contributions over a period of time, the sum accumulated at the end of the period will increase. This is commonly known as dollar cost averaging.

At the end of the period, the redemption (or sale) price of the units held will represent the accumulation of all contributions, plus returns generated from the total contributions since the first purchase was made. The effect is more noticeable the longer the holding and contribution period. This form of savings is the basis of most pension fund accumulation e.g. the Employees Provident Fund.

In addition to investing in unit trust by cash or through a regular savings plan, you can also invest using EPF Members’ Investment Scheme. The EPF will process a request to transfer an amount from a member’s Account 1 to approved unit trusts funds if:

1. The Account 1 balance is not less than the required basic savings, details of which are enclosed in the table 1 as prescribed by the EPF for respective age of the EPF members.Table 1 – Basic Savings Amount in Account 1 (Effective from 1 January 2014)
   

   YEAR (AGE)	BASIC SAVINGS (RM)	YEAR (AGE)	BASIC SAVINGS (RM)
   18	1,000	37	54,000
   19	2,000	38	59,000
   20	4,000	39	64,000
   21	5,000	40	69,000
   22	7,000	41	76,000
   23	9,000	42	81,000
   24	11,000	43	88,000
   25	13,000	44	95,000
   26	15,000	45	102,000
   27	18,000	46	109,000
   28	21,000	47	117,000
   29	24,000	48	125,000
   30	27,000	49	134,000
   31	30,000	50	143,000
   32	34,000	51	153,000
   33	37,000	52	163,000
   34	41,000	53	174,000
   35	46,000	54	185,000
   36	50,000	55	196,800

2. The member is less than 55 years old
3. An account in the approved Unit Trust Scheme has been opened into which the transfer can be processed
4. No transfer has been made in the previous three (3) months from the EPF Members’ Investment Scheme

   Transfers under the EPF Scheme is made at an intervals of three (3) months from the date of the last transfer, subject to the availability of the required balance in Account 1.

5. The amount eligible for transfer is not less than RM1,000

6. The amount to be transferred is not more than 20% of the Account 1 balance remaining after deducting the required amount of basic savings prescribed by the EPF (subject to minimum of RM1,000)

Unit trusts are very affordable. Investors can start with an investment amount as low as RM100.

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

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.

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.

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.

When making direct investments in Bursa Malaysia, the investor faces costs and charges that are much higher. With unit trusts the economics of the transaction are more favorable i.e. the fees and charges/brokerage etc. per investment ringgit are likely to be less. As the 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

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.

Any purchase of securities will involve an element of risks. As unit trust funds principally invest in listed stocks, it may be prone to losses as a result of global, regional or national economic conditions, governmental policies or political developments. Market uncertainties and fluctuations in the market caused by these uncertainties will affect the net asset value (NAV) of unit trusts which may fall or rise, thus causing the income generated by the fund to fluctuate from funds with higher risk, higher returns to funds with lower risk, lower returns.

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 fund manager may need to sell the security at a discount to its fair value, which eventually affects the fund’s value.

Performance of the fund depends on the experience, expertise, knowledge and investment techniques of the fund manager. Poor management of a fund can cause considerable losses to the fund, which in turn may affect the capital invested.

Ideally the purpose of any investment is to secure returns that are greater than the inflation rate. While a fund will constantly seek to maximize 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.

Fixed income securities and bonds are particularly sensitive to movements in interest rates. When interest rates rise, the value of fixed income securities and bonds fall and vice versa, thus affecting the NAV of the fund. The general interest rate environment of the country may affect the value of the investment even if the fund(e.g Syariah Fund) does not invest in interest bearing instruments

The first cost that an investor incurs in relation to investing in unit trusts is the initial service charge (sometimes called the service, sales, entry, or ‘up front’ charge). This is the cost to an investor investing in unit trusts and it is levied primarily to cover the marketing and distributing units and monitoring his investments by the unit trust consultant for the duration the unit trusts is held.

Sometimes referred as repurchase charge. This fee represents a deduction by the UTMC from the proceeds of disposal of an investor.

Management expenses include expense for portfolio management, the manager’s fees, trustee and custody costs, audit fees, administrative charges like printing of annual reports, distribution cheques, postage and other services properly incurred in the administration of the fund. These costs are paid out of the fund’s assets.