Unit Trust – The Beginner Guide

Unit Trusts is a form of collective investment. It allows investors with similar investment objectives to pool their savings. These pool of saving (the fund) is invested into a portfolio of shares or other assets class. The fund itself is being managed by the professional Fund Manager.

Regulation

This scheme is regulated by Securities Commission in Malaysia. SC is responsible to issue Guideline on Unit Trust Funds that govern the establishment of the fund in Malaysia. Other SC responsibility is to protect the investors’ interest.

Flow diagram of Unit Trust

Fund Manager’s Role

The Fund Manager’s role is to make the investment decision and manage the investment on behalf of the investors.

Asset Class

Ultimately, a Fund Manager will invests the fund into a portfolio which may include the asset classes as followings:

  1. Money Market
  2. Fixed Income Instrument or Bond
  3. Equity

Money Market

Refers to the corporations network, financial institutions, investors and governments which are dealing with the flow of short term capital such as below:

  1. Commercial paper
  2. Banker’s acceptances
  3. Local government notes
  4. Interbank loans

Fixed Income Instrument

Bond is a type of debt instrument issued by the corporations for a period of more than 1 year. It purpose is to finance their capital expenditure.

 

Bond in Unit Trust

Equity

It means ownership. Equity are shares that represent part ownership of a business enterprise. Equity can be devided into two types of funds, namely:

  1. Growth fund is a diversified portfolio of stocks.
    • It aims for capital appreciation and pays little or no dividend. Growth stocks are from companies that expected to grow more rapidly than the overall stock market
  2. Income fund which invests in stocks that provide income to unit holders in the form of dividends.
Equity in Unit Trust

Unit Trust Mechanism

Unit holders do not own the securities in the portfolio directly. Ownership of the fund is divided into units of entitlement. As the fund increases or decreases in value, each unit increases or decreases accordingly. The number of units held depends on the unit purchase price at the time of investment and the amount of money invested.

Return of Unit Trust

Return on investment for unit holders is usually in the form of income distribution and capital appreciation. It derived from the pool of assets supporting the unit trust fund. Each unit earns an equal return. Determined by the level of distribution and/or capital appreciation in any one period.

As the investors try to maximise returns on their financial resources, unit trusts may provide an ideal way in the long term horizon. Over the long term it should produce superior returns to cash savings and fixed deposit investments.

The cost of potentially high returns it comes with the risk that accompanied within this investment. For a short term, returns on investment for unit trust products is normally less than the fixed deposits.

However, for medium (3 to 5 years) to long term (more than 10 years) unit trust investments generally will provide better returns at acceptable levels of risk.

Should I consider to invest in Unit Trust?

Unit trust investors usually have savings to invest but do not have the time or the inclination to hold portfolios of direct investments by themselves.

Therefore, they prefer to invest in a secure and reputable investment vehicle which will suits their objectives. Unit trusts allow investors to have easy access to a wide range of investments not normally available to them.

Source:

  1. FIMM
  2. Securities Commission Malaysia
  3. The Economist Guide to Financial Markets
  4. Napkin Finance

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