Introduction

Unit trusts are an excellent way for investors with limited capital to pool their money together and achieve similar investment goals. There are also Shariah-compliant funds available for investors who want to invest in a Shariah-compliant portfolio of securities.

• Unitholders - Have the right to trust assets and are the beneficial owners of the assets.
• Fund Manager - Implement investment strategies and manage trading activities for the unit trusts funds.
• Trustee - Ensures the fund manager act according to the fund’s objective and safeguards the fund’s assets. (The Sun)

Unit trusts are a popular investment choice, but it's important to remember that unit trusts are not completely risk-free. Before investing in a unit trust, there are several important factors that investors must consider. This article will walk investors through these considerations so that they can make informed decisions about their investments.

Investors may read also “All You Need to Know About Unit Trusts: A Comprehensive Guide For Beginners” to know more about Unit Trust and how to get started.

Key Takeaways

• Investors must carefully consider Personal Factors, Understand the type of unit trust and Evaluate the selected funds before starting their unit trust investment Journey
• Dollar / Ringgit Cost Averaging (DCA) are one of the long-term investment technique that is famous in unit trust investment
• Each Unit trust fund will expose to general risk (Market risk, Inflation risk) and specific risk that is outlined in its prospectus that investors must aware of

Step 1: Personal Factors

Different Unit Trusts have different investment strategies based on their investment objectives. By taking into account personal factors, investors get to invest in funds that best suit their circumstances and goals that are more likely to achieve.

1. Define Financial Goals

Examples of Financial Goals:

Identifying financial goals can help investors to know the investment timeframe, return expectations etc. This able to narrow down which funds would work best for their goals and will help investors choose a fund that is best suited to their personal circumstances (e.g. capital growth, regular income & capital preservation)

For example, young investors with a long investment horizon, seeking capital appreciation may find that the Equity Unit Trust fund works well for them.

2. Risk tolerance

Source: PAI

Risk tolerance is how comfortable you are with losing money in the short-term, in order to potentially make more money in the long term. Hence, it is important to select funds with asset allocations and strategies that fit your comfort zone. For example, equity funds tend to be riskier than fixed-income funds, so they may be better suited for younger investors. Fixed-income funds are usually more conservative, which makes them better for retirees who don't have a regular monthly income anymore. (Public Mutual)

The risk level of each category of the unit trust fund is different. Investors can read the fund's prospectus or consult a professional adviser to learn more about a particular fund's risk level and strategy.

3. Investment horizon

The investment horizon is the timeframe an investor intends to keep his or her money invested in a unit trust scheme. In general, unit trusts typically provide better returns in the long term, so they may not be the best option for short-term investors or investors who need the money for the near future. There’s a risk that the return on investment may not be enough to make the unit trust worth it once investors factor in the fees. (BlackRock)

4. Tax

Under the Income Tax Act 1967, the unit trust will pay tax on the income earned during the tax year at the rate of 24%. (The Sun) While according to KPMG, with effect from 1 January 2022, Unit Trust Funds (“UTFs”) which have been receiving Foreign Source Income (“FSI”) in the form of dividends, interest or rental are being subjected to income tax upon receipt in Malaysia.

The tax rate can have an impact on investable income and potential returns. If there are tax exemptions or lower rates, more money can be invested, which could lead to higher returns.

Step 2: Understand the types of Unit Trusts in Malaysia

Before investing in Unit Trusts, it is crucial to understand the different risk levels associated with each type of fund. Knowing which type of fund suits your needs will help you make informed investment decisions.

Source: Areca Capital

Source: Fimm, FSMOne, Nerdwallet, Elearnmarket

Apart from conventional unit trusts, there is also Shariah-compliant unit trust that invests according to Shariah requirements, to cater to different investors' needs and wants. In 2021, the total value of all unit trusts was RM526.89 billion, with 24.4% being attributed to Sharia-compliant funds and the rest (75.6%) being made up of conventional funds. (Capital Market Malaysia)

Note: Shariah-compliant funds will exclude companies related to conventional banking, insurance, gambling, alcoholic beverages and non-halal food products.

Step 3: Fund Evaluation

1. Understanding the Fund

Fund's annual report, prospectus and past performance for different time frames (e.g., the fund’s rate of return over the past year, three years, five years, and ten years) are all useful for investors to understand the fund. By comparing these with other similar funds, investors can get a better idea of the potential return on investment for the chosen fund.

However, past performance is not the only factor to consider when making investment decisions. Remember that even investments with a long track record can fluctuate in value and are not guaranteed or an indicator of future performance. (OCBC Personal Banking)

Queries that investors can look into further:

1. What is the fund’s objective and holding in stocks and bonds?
2. What are the specific stocks and bonds that the fund is holding?
3. What are the risks involved in the fund allocation?
4. What is the past year's annual return and the fund manager’s opinion on the future market outlook?
5. What are the fund’s liquidity, fees and expenses charges?

Investors must make sure to do their own research or consult a professional before investing in any selected fund, to ensure that the fund or investment strategies suit their personal circumstances such as goals, risk tolerance, investment horizon, etc.

Note: All information is easily available on the fund’s Management company website, online unit trust platforms (FSMOne, eunittrust) and more

2. Fund Manager’s experience

Fund manager’s experience and the performance of funds currently managed or managed by the fund manager in the past is an essential factor that should not be overlooked.

Investors can evaluate fund managers’ performance during tough times to really see which fund managers have the skills to preserve capital. When markets are down, look closely at how each manager performed. Did they lose less than their peers? That's the type of fund manager investors want to handle your money. (Loanstreet)

Queries investors should ask themselves when reviewing funds’ track record: (Glenn Curtis)

1. Did the fund manager deliver results that are stable and consistent with general market returns?
2. Was the fund more volatile than the major indexes?
3. Was the Portfolio turnover ratio (PTR) unusually high?
4. What is the size and reputation of the fund management company?

Note: High PTR imposes higher costs and reduces the fund’s performance

3. Fees (Expenses Ratio)

The expense ratio of a unit trust varies between the different funds and this can have a significant impact on an investor's portfolio, as a high expense ratio may eat into the fund's returns. For example, a unit trust fund with an expense ratio of 1.5% means that for every RM1,000 invested, approximately RM15 per year will go towards the operating expenses. (Emmanuel Surendra)

When evaluating the funds, be sure to read the fact sheet carefully to understand the fees associated with the funds, issuing companies, and platforms.

The table below provides a general overview of the types of fees charged.

Source: FSMOne, iMoney, Principal Global Technology Fund, Principal Islamic Lifetime Sukuk Fund

Note: Unit Trust online trading platform have a basket of funds from different fund house, no switching fee is applied but a “wrap fee” of 1.5% is charged yearly where investors can switch unlimited funds in a year for 0%. (sales charge only one-off, the wrap fee is yearly)

Things to take note of when investing in Unit Trust

1. Investors can invest in unit trust funds via:-

• Lump Sum Purchases - Investors put a lump sum of monies (e.g., getting from inherence) into a unit trust.
• Regular Savings - Commonly known as Ringgit Cost Averaging (RCA) / Dollar Cost Averaging (DCA) where investors invest a fixed amount of money (e.g., RM200 every month) on a regular basis into a unit trust fund investment, rather than investing in one lump sum. This allows investors to average out the unit prices over time, and potentially reduce the effects of market volatility.
• EPF Savings - Invest via EPF Members’ Investment Scheme (MIS) which the capital is from EPF member’s Accountn1. Details are stated in a previous article “What You Need To Know About Investing In A Unit Trust”

2. Rebalancing

As risk level changes, it's important to adjust the portfolio accordingly to make sure it's still in sync. (KC LAU)

3. Avoid emotional bias

Potentially leads to irrational decision-making that can ultimately hurt portfolio performance.

The articles below give investors more understanding of Emotional Bias

• What is the Overconfidence Bias
• What is the Confirmation Bias
• What You Need To Know About Behavioural Bias To Invest Successfully
• What is Loss Aversion
• What is the Availability Heuristic

4. Do not switch funds frequently

Frequent switching will drag down investors’ overall returns and incur high switching costs.

5. Start your investment earlier

Start the investment sooner to see greater returns in the future due to the compounding effect. Examples are illustrated below.

Source: Public Mutual

*Assuming that the unit trust's rate of return is constant at 8%

By starting 10 years earlier, John's investment value could grow 116% more than Stephanie's investment value with the same total amount invested (RM200,000) when both of them reach the retirement age of 60.

6. General Risk associated with investing in a unit trust fund

Note: Apart from general risk, investors can know more about the fund’s Specific risks via the fund’s prospectus

The Bottom Line

Unit trusts have been around for a while and are excellent vehicles for long-term wealth creation and preservation. With so many different funds available, it's important to have clear investment objectives and to do your research before committing to one.

Keep in mind that unit trusts do involve some underlying risk, so be sure to take those into account before making any decisions. If you're new to investing, consulting with a professional unit trust consultant is a great way to get started formulating an investment strategy that will work for you depending on your individual needs and current situation.

Don't wait, start today and watch your investment grow!

References

• Public Mutual. 5 Pointers on Unit Trust Investing
• Black Rock. What are mutual funds?
• The Sun 2021. Tax Matters – How are individual unit trust holders taxed?
• KPMG 2022. Taxation of Unit Trust Funds in Malaysia.
• Emmanuel Surendra 2014. Investment Guide: Beware Of These Investment Costs And Charges
• CFI 2022. Fund of Funds (FOF)
• Fimm. Understanding Unit Trust Scheme.
• OCBC. Unit trust
• Fimm. Risk of Investing.
• ET Money. 6 Things to Know Before Investing in Mutual Funds
• Glenn Curtis. 2022. How to Choose the Best Mutual Fund

Author

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This article is written by Looi Shin Nye, Research Analyst Intern

Looi Shin Nye is currently majoring in Finance and Investment at Tunku Abdul Rahman University of Management and Technology (TAR UMT). Shin Nye joined TED Optimus Sdn Bhd for 3 months as an intern, responsible for research work and article writing. She participates in Bursa Malaysia Derivatives Virtual Trading Challenge 2021. She is an in-house author from TED Optimus.