Financial Planning

Advantages of investing in unit trusts:

Ready affordability
This is an obvious advantage - it doesn’t cost much to invest in a trust fund. For an initial investment as low as RM500, an investor can buy into a fund and get:

Instant diversification
Investors in unit trusts can access a broader range of securities than they could when investing on their own. With a given sum of money, the individual investor can only buy a small number of shares and in a few companies. But when he invests that sum of money in a unit trust fund, he achieves immediate diversification - his money is pooled with those of other investors and this resultant bigger pool of money gets spread out over many more companies because of the greater purchasing power.

With diversification comes reduced risks. The loss made by a few counters can be offset by the gain made in the other counters. The investor can further reduce his risk by investing in several funds instead of just one fund.

Liquidity
There is ease in selling and buying the units compared with investing directly in stocks of companies where prices and the opportunities to transact depend on the supply and demand of the shares at that time.

Continuous professional management
Unit trusts are managed by a team of experienced professionals who manage the fund in an informed and organised manner as opposed to the individual investor who may invest in a random fashion. Investment decisions made by fund managers are based on extensive research and their own investment skills, and they continuously monitor the portfolio based on researched information.

Reduced stress
The investor does not have to worry about personally monitoring his various investments - keeping an eye on their performance and deciding when to buy or sell. Instead he has the superior investment skill of professionals to do it for him. Unit holders receive interim reports every six months on the progress of their funds, the investment changes made and dividends paid, as well as the fund manager’s opinion on the investment market and economy. They also receive the annual reports.

Access to broader array of financial assets
Unit trust fund managers can trade in investment products that are normally inaccessible to the individual investor, such as government and corporate bonds, which may be restricted to institutional investors. Some of these products are traded in large amounts, which limits the individual investor even when he has the opportunity.

Disadvantages of investing in unit trusts

Subject to market risks
Since unit trusts invest in marketable securities, they are of course, exposed to market movements. Diversification will help reduce the risk but it will not eliminate risk entirely. The prices of units go up and down, dividends may or may not be paid, and you may realise a gain or loss when you sell your units.

Not suitable for short-term investment
Unit trusts are an investment vehicle suited for the medium to long term. This is because the gains from the investment in unit trusts are not realised immediately. At best one could sell the units held once its price appreciates. However, the upward movement in price, being dependent on the movement of the market, is usually much slower than the market’s movement.

The moderating effect of diversification also works both ways i.e. to spread the risks in the case of a market downturn as well as the rewards in the case of an upswing in the market. Dividends for unit trusts are declared on a periodic basis and the compounding effects would only be realised over time in a favourable market environment.

No custom-made service
Investors of unit trusts are buying into an instrument of mass investments, hence they do not have control over the investment decisions made by the fund manager. They can’t tell the manager what stocks to buy or what not to buy, and when to sell. The manager follows his own counsel, not the investors’. The most investors can do is to ensure that the objectives and investment policies of the fund match theirs. That’s why it is so important for investors to read the fund’s prospectus carefully and to select the fund wisely.

A Word about Costs Associated with Unit Trusts
There are some costs to the investor of unit trusts. It is important that you understand the various fees that will be charged to you by the fund as they will affect your total returns.

The unit trust companies are allowed to charge three types of fees:

	Initial service charge - this is usually built into the fund’s unit selling price;
	Repurchase fee - this may be included in the fund’s unit buying price; and
	Management fee - this represents the company’s fee for administering the fund and is directly charged to the fund.

In addition, there are also other expenses such as the trustee fee and brokerage expenses borne by the fund.

You should examine the fees structure of the various funds you are considering. Ultimately what is most important is the fund manager’s competence. It is pointless to choose a cheap fund if it is managed by a mediocre fund manager, but a great fund manager may warrant higher fees.

What is a unit trust?

Unit trusts have grown in popularity in recent years. It’s not hard to figure out why. Unit trusts are the small investor’s answer to achieving wide investment diversification without having to come out with prohibitive sums of money. And the benefits do not end at that.

But first, what is a unit trust? A unit trust fund is an investment scheme that pools money from many investors who share the same financial objectives. In exchange for the money, the fund issues units to the investors who are known as unit holders. Unit holders can sell (known as redeeming) their units back to the fund, or buy (and sell) further units.

Managing the fund
Meantime the fund is managed by a group of professional managers (known as the unit trust company) who will invest the pooled money in a portfolio of securities such as shares, bonds and money market instruments or other authorised securities to achieve the objectives of the fund. Because of the large sums collected, the fund manager is able to diversify among various investments in such range and diversity that the risks of investing are minimised.

Income earned
The total assets of the fund determine the value of the fund and the price paid by unit holders or the amount received when they redeem their units. The unit trust fund earns income from its varied investments in the form of dividends, interest income and capital gains. This income is then distributed to the unit holders in proportion to the units they hold, in the form of dividends or bonus units.

Protection for unit holder
As a unit holder, your protection within a unit trust is ensured in the way unit trusts are structured. Unit trusts are actually trusts. The protection is enshrined within the unit trust deed which spells out the respective duties, responsibilities and expectations of the three parties in the unit trust who are namely:

	The unit holders who provide the funds for investing;
	The unit trust company providing investment, administrative and marketing services; and
	The trustee company which holds the assets of the trust on behalf of the unit holders.

There are three sources of information that you must examine when selecting a fund. These are the fund’s prospectus, the trust deed and the financial statements comprising the annual and interim reports which are available for inspection, free of charge, at the premise of the fund manager.

Read the prospectus
The prospectus is a very important document as it sets out the fund’s goals, investment strategies and policies and the risk-reward position it takes. It may be hard reading being full of legalese, but you must go through the fine print to ascertain that your goals and expectations match that of the fund. The financial accounts will show if the fund is sticking to its game plan and how well it is performing within the plan. Hence as an investor, you should consider the following factors when selecting a fund:

	Investment objective - it must be clearly stated or it gives leeway for the fund manager not to carry out your intentions of choosing the fund.
	Investment policies - the types of authorised investment and strategies should match your own convictions.
	Size of fund and growth trends.
	Any investment restriction, like minimum investment required.
	Level of risks with its investments - unit trusts don’t completely eliminate risks.
	Types and amount of fees - understand them so that you will be left with no surprises.
	Historical performance on total returns on an annual basis, NAV (net asset value which is essentially the worth of each unit), expense ratios, and particularly the distribution of income to investors and growth of assets - so that you can gauge how well the fund has performed over time.
	Latest investment portfolio - so that you know the percentage of holdings in each kind of asset.
	Information on Board of Directors, key management team (especially the fund manager, auditor and trustee.

More than half of Malaysian workers have not prepared for retirement while those who have, only started planning after age 40, according to a survey. The average age working Malaysians began preparing for retirement was 41, while retirees said they did so at 47. “That’s way too late. It doesn’t give them enough time to build their retirement fund,” Axa Affin Life Insurance Bhd branding and communications head Cheah Leng Sooi said in announcing the findings of the AXA Retirement Scope 2008. In the survey carried out by research house Synovate, 313 working people aged 25 and above and 319 retirees aged below 75 in urban areas were interviewed over the telephone. The survey, part of a global study conducted in 26 countries and involving 18,000 respondents, was undertaken for the first time in Malaysia, from July 23 to Aug 27 last year. Among those who had planned for retirement, most began after they married, had children, or fell into financial difficulties or had health problems, Cheah said. Their sources of retirement income included life insurance, Employees Provident Fund and personal savings. The retired saved an average of RM478 a month, and the working RM704, figures that were considered low compared with other countries. “Malaysian retirees feel that their retirement income is insufficient to cover household expenses. Their average income is RM1,243 but the amount they need is RM1,568 – a deficit of RM325,” she said. In comparison, Singapore’s average retirement income is RM3,690, and the amount needed RM3,465; while Thailand’s average income is RM1,276, and the amount needed RM903, according to the survey. The disparity between high and low income earners in Malaysia is wide, the high-income retirees having four times more than those with low income, the survey found. Despite insufficient income, three-quarters of the retirees said their quality of life had improved if not remaining the same, while 83% of the working group expect their quality of life to improve or remain the same.

The principle of Dollar Cost Averaging involves a discipline regular investment technique which may be applied to maximum effect in unit trust investing. All that an investor has to do is to invest a regular sum of money with a selected unit trust fund over a period of time. This way, he does not have to worry about market timing, or where shares prices or interest rates are headed. His regular investment amount will buy him less units when the market is up, and more units when the market is down. He will thus be able to accumulate units at an average cost which is lower than the average NAV per unit over the same period. This represents the dollar-cost averaging effect.

Effective 1 November 2007, EPF under its ”Beyond Savings” strategic initiative has introduced various enhancements to member’s benefit structure in stages. These enhancements are in accordance to the EPF Act 1991 (Amendment 2007) . One of the enhancements is the introduction of the basic savings concept that will be used to determine the minimum sum a member is allowed to withdraw from Account 1 for Investment Withdrawal.

Definition of Basic Savings
Basic Savings is an amount to be put aside in Account 1 progressively at various pre-determined age levels to enable a member to accumulate a minimum savings of RM120,000 at age 55.

A member needs to have a basic savings amount at the predetermined age levels. Amount in excess of the basic savings can be invested in products offered by external fund managers approved by the Ministry of Finance.

For more information please visit: http://www.kwsp.gov.my/index.php?ch=p2news&pg=en_p2news_hig