Why Isn’t One Investment Plan Right For Everyone?

Before investing, decide what you want your investments to do. Investing is simply using money to make more money. Investment ringgit are not meant to be used for daily living essentials.

You might choose to invest in bank deposits, government bonds, securities, or life insurance. They are all different, and no single investment channel fits the needs of every individual. Neither can a single financial product fulfill all our needs at different stages of our lives.

Since most unit trusts or collective investments limit their investments to securities, let us explore some of the reasons why investors, both institutional and individuals, might want to own a unit trust. Many prefer unit trusts because they are easily bought and sold. They represent variety and flexibility of returns. Unit trusts can be bought at varying prices, from very low to very high, and small amounts can be invested at convenient intervals. Unit trusts can be selected, often with excellent results, by having limited investment background.

When investing in unit trusts, investors can profit in two ways. They may receive distributions. Since the market value of unit trusts fluctuates, investors also profit when selling their unit trusts in the event of substantial or marginal increase in value. However, fluctuation also means the value of your unit trust can go down in value. That is why unit trusts are recommended for medium to long-term investment programme. Regardless of which unit trust is selected, it should meet the investment goals. A basic rule is that it should not be done on impulse.

 What About People Who Are Retired Or Have A Family?

Age is a strong consideration in investment decision. Notice how conservatism comes with age. With age, comes the awareness that a serious investment error could jeopardise the security that has taken years to accumulate. The closer the retirement, the fewer the years to rebuild.

Investment risk is quite different from gambling. Weighing risk based on facts is investing. Taking chances based on odds is gambling. The point is, age is an important factor in deciding risk.

Another strong consideration is responsibilities. A young individual beginning a career with the additional responsibility of one or more children must weigh these responsibilities. The most protection for the fewest ringgit should supercede any forced savings that would reduce family protection.

Financial needs change. How they are met should depend on our responsibility.

 Why Should I Start Investing Today?

Today’s decision should consider tomorrow’s needs. There is a direct relationship between the amount of money you need to accumulate and the number of years you have to do it.

For example, if you plan to have a RM120,000 education fund, have 20 years to do it, and expect an annual rate of return of 12%, you have to invest only a little over RM120 a month. Wait 5 years, and with 15 years left you will need over RM240 a month. Procrastinate another 10 years, you will have to take almost RM1,470 each month!

Time can be a real asset when planning for a child’s education or our retirement. The more time we have to save, the fewer ringgit we need now. Do not let time slip away.

 What Are The Three Rules Of Investing?

There is no simple formula for successful investing. If there were, it would include three basic elements:

1. Understand what we buy
2. Buy value at a reasonable price
3. Be patient

Understanding is so basic, it is often neglected. Too often an investment is made with no total understanding of the transaction. It is vital to understand your investment – the good, the bad, the risks and the rewards. Fully comprehending the objective of any investment will help you be more comfortable.

Value buying demands both research and discipline. A stock may be judged undervalued for various reasons. If an industry is out of favor, the market value of the stocks within the industry might go lower but, if the fundamentals are still positive, it is an opportunity for the investor to buy selectively as it is still a good value stock.

Patience is a vital ingredient of value investing. It could take several years for the value of your investment to materialise. This waiting period demands both patience and confidence. Most successful investors know it takes time for their investment to double, triple, and so forth. Professional managers generally agree that 5 years is reasonable.

Choosing A Professional Fund Manager : Why Can’t I Do It Myself?

“Put not your trust in money, but put your money in trust”

-Oliver Wendell Holmes

There are a lot of peolple who like to “do it their way” when it comes to investing. Right or wrong, they want to be captain of their ship. But not eveyone can or likes to be captain of their ship. Being a passenger has advantages. It is usually more comfortable and certainly less time consuming. When your investments are managed by someone else, you sit back and either reap the harvest or suffer the loss.

Bank deposits and insurance are the best known managed investments outside the securities area. They usually have some guarantee of principal or income, and the income is usually low with not much risk.

Where does that leave you if you want your money to not only produce a reasonable income now, but to also grow over the years?

The answer to your question is PROFESSIONAL FUND MANAGEMENT…..If you lack experience, time, financial resources, or courage to personally manage investments, or if you believe others can get better results, this is the way to go.

 Selecting The Right Unit Trust – How Do I Find A Unit Trust That Fits My Objective?

It used to be simple selecting a unit trust. Today, there are a multitude of different unit trust funds competing for investment ringgit. Perhaps a simpler way is to first identify your investment objectives. If you want your money to grow a larger sum in the future to pay for an objective and your risk tolerance is higher, you may choose a growth fund to do the job. On the other hand, if you need an ongoing income stream to pay for expenses and your risk tolerance is low, a better choice may be a bond fund. You may have different investment objectives, risk tolerance and time horizons at any one time, which warrants owning a mixture of different unit trust funds for different investment purposes.

 Why Do I Have To Spend All That Time Reading A Prospectus?

Before investing in any unit trust, read the prospectus. It’s required that you get one, so if it’s not offered, ask for it!

A prospectus is your protection contract. It tells you all you need to know about the fund. If you plan to own the fund, you will want to know how your money will be invested.

The prospectus is a blueprint of the fund. It tells what the fund managers can and cannot do with your money. It describes risk and limits, and the amount of risk the fund is allowed to take. It tells you whether the purpose of the fund is to make profit as quickly as possible or to make only reasonable gains while first bringing in income and protecting your principal.

Many investors who are in a hurry to reach their goal, take the shortcut of not reading the prospectus. This could jeopardise your investing decisions. Read the prospectus. Arm yourself with sufficient information to make an ‘informed decision’. It prepares you for what lies ahead.

There are many unit trusts funds from which to choose, but having considered the type of fund or funds most likely to meet your needs, you have already narrowed down your choices considerably.

The next logical step is to decide which unit trust fund to invest in.

What To Look For ?

A random check will confirm most, if not all, investors would look at the performance or investment results.

Unfortunately, it is impossible to predict a unit trust’s future investment performance. This will depend on the type of fund, the general market trends and the investments which a fund manager picks.

Most managers would provide the past performance tables that normally show the total returns since inception or how much an initial investment made several years ago would be worth today with any income reinvested.

Look at the performance of the funds but do not pay too much attention to period of a year or less – external factors beyond the control of the managers may have influenced results – a high flyer may not stand the test of time. Ideally, a fund showing consistent performance over a long period, the longer the better.

Check the performance of a company’s other funds to make sure that it was not just a bit of luck with one fund.

Do not let another type of fund take your fancy just because it has produced better results than the one you had initially chosen. It may be more risky and may not meet your requirements.

However, be warned, past performance figures are no guarantee of the future. A fund that has performed well in the past may not do so in the future and vice versa. Go to Fund Performance for fund comparisons.

Do’s and Don’ts of Choosing a Unit Trust Fund

Do

• Decide which type of unit trust fund meets your saving needs.
• Shop around for a reliable unit trust company
• Check whether investment limits, frequency of income payments, etc, are suitable
• Check past performance records

Don’t

• Don’t choose any unit trust fund just because its performance has been good, make sure it is the right fund for you.
• Don’t pay too much attention to short term performance, good consistent performance over all periods is the best lead.
• Don’t decide on a unit trust fund just because it has low charges, good performance is far more important
• Don’t borrow to invest in unit trust unless you are absolutely aware of the risk involved.

With the proliferation of various types of investment products in recent years, people often look for a straight forward, professionally managed investment opportunity that caters for basic investment needs. Public Mutual Berhad has succeeded in meeting those needs with its unit trust funds.

Children’s Education

Unit trust can help you to cover the spiralling cost of education for your children or grandchildren. The sooner you start your plan, the lesser will be the burden. Time can be your greatest ally. Go to Education Planning for more details.

Home Ownership

Unit trust can help you to pay off your mortgage earlier, purchase a bigger house or upgrade your existing house. As with any plan, start early. Many bricks build a castle. Go to Home Ownership Planning for more details.

Retirement

Growing old and retiring is inevitable. It is never too early to plan for retirement even though you have the comfort of the Employees’ Provident Fund (EPF). You have the right and choice to retire in dignity. Retire comfortably. Plan a nest for your retirement home, orchard and the likes. Unit trust can help do the job. Go to Retirement Planning for more details.

Cash Reserves

The only certainty in life is the uncertainty or unexpected emergencies. Unit trust can help you to set aside some cash for rainy days.

Regardless of your own needs and wants, unit trust makes sense, for potential return and security.

Most unit trust managers offer you a choice of ways to invest.

As A Lump Sum

The minimum lump sum investment in a unit trust is typically in the range of RM500 to RM2,000. There is no limit on how much you can save and invest in a unit trust, though if you are making a very large investment, it is usually advisable to spread your holdings among different funds so that you do not have all your eggs in one basket.

If you are worried that the stock market could fall back from a peak just as you invest your lump sum, you could consider investing it gradually through a regular savings plan.

Via A Regular Savings Plan

Regular savings plan allows investors to put in a set amount monthly to the unit trust of their choice. Usually the minimum initial amount is RM1000 though it may vary with fund managers. The minimum monthly additional investments usually start from RM100. This is a convenient way of saving, as monthly additional investments are usually paid through a bank’s standing instructions.

The regular savings plan is also flexible since they are not tied to a particular period of time. This can enhance the returns from unit trust that performs reasonably well over a long period. An advantage of the regular savings plan is that they even out fluctuations in unit price. The same investment each month will buy more units when the price is lower and fewer when the prices are high. The effect of ringgit cost averaging, as it is called, is to make the overall cost of units slightly cheaper. Of course, another advantage is that you can cash in the whole lot or part of it without penalty on any business day. Regular savings plan can improve returns significantly in the long run.

An attractive feature of unit trusts is that they are price transparent. You know precisely what the charges are from the onset and they reflect the actual value of the trust. The pricing mechanism of units is designed to ensure fair pricing. The value of the unit trust scheme is always based on its Net Asset Value (NAV) i.e. the market value of a fund’s underlying investments, plus other assets less liabilities, at the end of each trading day. The NAV per unit is thus the NAV of the fund divided by the total number of units in circulation.

There are two prices quoted for any unit trust fund i.e. the Manager’s Selling Price and Buying (Repurchase) Price. The Selling Price is the price at which the management company sells its units to the unitholders. The Buying (Repurchase) Price is the price at which the management company repurchases its units from the unitholders. The spread between the two prices is usually about 5%.

The Guidelines on Unit Trust Funds issued by the Securities Commission regulates the pricing of units by management companies to ensure that the units are fairly priced and investors’ interests are protected.

Two pricing methods may be practised by management companies – `Forward Pricing’ and `Historic Pricing”.

Under the historic pricing method, the Selling Price and Buying (Repurchase) Price for units are based on the NAV of the fund at the close of the Bursa Malaysia, immediately before the investors’ request to purchase or redeem units is received by the management company. For example, the selling price computed at the close of the Bursa Malaysia on Monday, will be valid and enforceable for investors’ purchase of units on Tuesday, until the next valuation is computed at the close of the Bursa Malaysia on Tuesday. Thus investors will know the dealing prices for their unit transactions.

With the forward pricing method, both the buy and sell transactions are traded at prices next determined, i.e. the Selling Price and Buying (Repurchase) Price are based on the NAV of the fund, at the end of the day immediate upon closing of the Bursa Malaysia, after the investors’ application to purchase or redeem units is received by the management company. The dealing prices for transactions made by investors will only be known at the end of each business day, upon the close of the Bursa Malaysia. For example, suppose an investor redeems 10,000 units on Tuesday. The Buying (Repurchase) Price for the units redeemed by the investor will be based on the NAV of the fund computed at the close of the Bursa Malaysia on Tuesday (which will be published in major newspapers the following day, on Wednesday).

“Under the SC Guidelines on Unit Trust Funds, forward pricing is the preferred method of pricing unit trust funds. Historical pricing is no longer being allowed for new funds/schemes.”

The Role of Regulator

The Securities Commission Act 1993 provides that the Securities Commission (SC) is responsible for regulating all matters relating to unit trust schemes.

The SC has drawn up a set of Guidelines on Unit Trust Funds (Guidelines) to ensure a fair and consistent application of policies in considering proposals by management companies of unit trust funds.

The Guidelines are formulated with the objective of providing a regulatory framework that would protect the interests of the investing public and facilitate an orderly development of the unit trust industry. The requirements of the Guidelines are to be complied with by all parties involved in a unit trust scheme.

In addition to the above Act and Guidelines, all unit trust management companies must comply with the Companies (Amendments) Act 1997, the Securities Industry Act 1983 and Trustee Act 1949.

The Role Of The Trustee

Whatever may happen to their performance over time, unit trust managers have a reputation for the stability of their funds that is second to none. Much of this is due the legal framework in which they operate. The government lays down strict rules that unit trusts have to follow and the machinery for ensuring that this is done.

Every individual fund has its own independent trustee, although for administrative simplicity, it is not unusual for unit trust management companies to engage one trustee for all funds. The trustee can be the Public Trustee of Malaysia or any independent trustee of Malaysia or any independent trustee companies.

The trustee’s primary role is to see that the terms of the fund’s deed are adhered to. The deed is a set of rules under which the trust is run, setting out such things as the investment scope of the fund.

The funds’ assets are always in the custody of the trustee. Although the manager makes the decisions about the management of those assets, when to buy and sell, he cannot get his hands on them directly. This system ensures that the funds will not be used for fraudulent purposes. The manager has to deal via the trustee who will ensure that the day-to-day work of running the trust, the funds’ accounts, valuations and calculations of unit prices are carried out properly and in accordance with both the deed and the rules laid down by the SC.

The trustee is also responsible for seeing that all the relevant paperwork is carried out. The trustee takes responsibility for overseeing the creation and cancellation (release) of units in the fund. The Guidelines also stipulate that unit trust managers have to produce semi annual and annual reports to its unitholders.

Where Would The Trust In Units Be Without The Trustee ?

Guidelines On Unit Trust Funds

In addition to the regulatory and safeguarding roles of the Regulator and Trustee respectively, the Guidelines provide additional safety features to protect the interest of the investing public. The Guidelines describe the characteristics of the investments permitted as opposed to prescribing the investments (which was previously investment in authorised Malaysian assets only) Furthermore, the Guidelines also reinforce the safety net by ensuring the funds are not overly exposed to high risk stocks and any single group of companies.

The Guidelines are subject to review by the Securities Commission as and when it deems fit and necessary to protect and ensure the growth of the industry.

The Federation of Malaysian Unit Trust Managers (FMUTM)

The first unit trust fund in Malaysia was launched in 1959. Who would then have imagined that years later there would be billions of ringgit in funds under management?

The rapid growth of the industry in recent years has led to the formation of the Federation of Malaysian Unit Trust Managers on 7 August 1993.

The Federation was set up with four objectives :

1. To promote the industry
2. To agree on standards of practice for the protection of the interests of unitholders.
3. To maintain the good name of the industry
4. To improve regulations, tax and other rules affecting the sales of unit trusts.

The Federation is represented by most of the unit trust managers in the Industry

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 requiring specialized knowledge and training. It involves the study of a variety of factors.

Some of the factors which have to be examined are,

1. Comparisons of all industries in the economy
2. Relative studies of companies within a promising industry
3. Personal contact with management of promising corporations
4. Evaluating the effect of international events, both monetary and political
5. Determining the results of government policies on each industry

Professional management is also interested in studying less obvious factors such as wage rates, which might affect the economy or the profitability of certain companies or corporations. It requires careful study of individual companies within the industry to determine which of the many companies offer the best prospects for the investors. It requires comparing this company with the best companies in other promising industries. Since all this factors are constantly changing, re-evaluation and study have to be continuous.

Diversification

Diversification means spreading one’s investments among many securities. It is an important method of reducing risk. It decreases the danger of damaging losses, which can occur through having all of one’s eggs in one basket.

Diversification is difficult and expensive for a small investor because the cost of purchasing numbers of shares in many companies at the same time is disproportionately high.

Unit trusts with their resources are able to make widely diversified investments available to even the smallest investor. Diversification involves the ownership of many different securities. All the securities owned by an individual investor or unit trust fund are referred to as an investment portfolio.

Liquidity

An investor can sell his units, wholly or partially, at the following trading day’s unit buying price. Units have a high liquidity, that is, they can be readily converted into cash.

It has to be remembered, however, that unit trust’s units will be redeemed at the prevailing buying price on the following day after receipt of the repurchase form. The unit price may be higher or lower than the price at which the investor started the plan. Unit trusts should be regarded as a long term, rather than short term investment.

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.

As an illustration, if at 25, you invested RM100 at the beginning of every month at an interest growth of 10% per annum until 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, 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 – The Convenient Factor

Few people have the experience, time or facility to properly set up an investment programme, much less to supervise it constantly. Unit trust managers have emerged as professional organisation 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 semi annual and annual reports which describe

1. The portfolio of the funds

2. Investment changes made in the period

3. Distributions paid, if any

4. Fund manager’s opinion on the economic and market outlook

A unit trust is a financial vehicle through which individuals may invest their money. The idea behind unit trust is better investment through collective investing. That is to say pooling the investments of many investors, individuals and institutions.

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

1. Professional management at a low cost.

2. Safety through the spreading of risk (diversification)

3. Liquidity

4. Ease of transaction

5. Capital appreciation/income stream

The operation of a unit trust may be best explained by outlining its similarities with the operation of a bank, with which most individuals are familiar.

Many individuals deposit money in the banks, for which they receive interest. These individuals expect complete liquidity where they must be able to withdraw their deposits in cash at any time. The banks employ professional managers to look after the deposits. The deposits 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 more productive, 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 managers at a low cost to the individual investors. These managers diversifies 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 :

· The trustee, who holds the assets of the trusts on behalf of the unitholders.

· The manager, who is the promoter of the scheme and provides investment and administrative expertise and markets units to the public.

· 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 :

· 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.

· The deed and prospectus are scrutinised by government authorities, prior to an offer of units being made to the general public. The managers and trustee are themselves approved by the regulators.

· A buy back provision or covenant in each deed which requires the manager to redeem an investor’s units within specified time limits at a price determined in accordance with the deed.

· Provisions in the deed under which the manager 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.