Today we will learn about what unit trust is all about. We will look at the structure, the advantages, the disadvantages, and what I think about unit trust.
In the most simplistic sense, unit trust is a medium where people (investors) pool their money to be invested in the financial markets.
Around the world, there are many other terms that are similar to unit trust. Some are called mutual funds, managed funds, and investment companies. The difference between them is just the legal structure whereby unit trusts are being run under the TRUST structure while others are run under the COMPANY structure.
STRUCTURE
Firstly, let’s talk about a structure that most of us are familiar with, which is the company structure. Assume there’s this company called Blogobob Sdn. Bhd. The company’s primary business is to sell Nasi Lemak. The company are run by the management team and being supervised by the board of directors. The company’s objective is to make money for its shareholders (obviously..). Have a look at the COMPANY structure below:
Now, let’s have a look at a fantasy Unit Trust fund named Blowspot Ittikal Fund. Its primary business is obviously to make investments. Have a look at the UNIT TRUST structure below:
As you can see above, unit trust structure is similar to the company structure, just that the participants are labeled differently. Also, of course, there are other legal aspects that are different, but we’re not going to talk about that in this article.
Based on the diagram above, we can conclude that unit trusts are run like how other businesses are supposed to run. Fund Managers are the management team. The trustees are the board of directors. The unit holders are the shareholders. Like we have discussed before, Blogobob Sdn. Bhd. deals in the business of Nasi Lemak. Blowspot Ittikal Fund on the other hand deals in the investments of monies in the financial markets.
Simple huh? Now, let’s have a look at the advantages and disadvantages of investing in unit trust funds as opposed to investing yourself directly.
ADVANTAGES
Diversification
Due to the amount of money the funds hold, sometimes, to the billions of ringgit, they are now able to spread risk across a vast number of financial instruments.If you had invested your money directly into the market, you won’t be able to achieve the level of diversification as sophisticated as the unit trust funds’. Say you’ve got RM10,000 versus a unit trust fund that manages RM10 billion. The fund can spread the risks more efficiently than the individual investor.
Professional Management
You are handing over your money to a fund that is managed by a full-time fund manager. These people are well-qualified (hopefully..) and they do this job for a living. It’s their profession.Also, these fellas have resources that are not readily available to us as retail investors.
Theoretically, that is more beneficial than if you had invested your money yourself.
Convenience
It is rather easy to administer the buying, selling, and holding of your unit trust investments.Liquidity
Investors can sell their units for cash on any business days.Affordability
The minimum amount of investment for most unit trust funds is RM1,000 but you can still enjoy the benefits of owning a well-diversified investment portfolio.
DISADVANTAGES
High Fees
Quite a number of funds charge a hefty entry fees (service charge) and exit fees. Public Mutual for example is now charging 5.5% for every new equity unit trust investment. In a way, you have made an up front loss on your investment.Ongoing Fees
Unit trust funds have ongoing management fees. Certain Public Mutual funds for example charge you 1.65% per annum. Take note that this is charged regardless of the performance of the fund. This means that even if your fund has recorded a negative 10% return for that year, management fees will still be charged.Incompetent Fund Managers
Even though the managers are well-qualified, there is still the risk of having incompetent managers managing your money. They might not adhere to the rules and regulations of the fund. Also, there’s the risk of under performing managers.Different Investing Style
The investing strategies and styles might differ from your own. You might be an investor that prefers to invest in small-cap stocks while the fund you invested in focuses on blue chip companies.Performance not guaranteed
Unlike fixed deposits, and savings accounts, the performance of most unit trust funds are not guaranteed. This might not suit certain conservative investors.Idle Cash
Though it is good that the liquidity of unit trust funds is always sufficient for redemption purposes, it also has its own drawbacks. To be able to achieve that level of liquidity, unit trust funds have to maintain a certain level of cash reserves to service the needs of investors wanting to get out.Now, money sitting around as cash will not earn you anything. In other words, monies that are supposed to be invested in stocks, bonds, and etc. are now being kept as cash in banks, earning little to nothing at all.
Hard to do Research
When it comes to investing directly into the market, you are able to conduct fundamental analysis and technical analysis research. You are able to look at the company’s books and charts. However, for unit trust funds, these information might not be readily available. You have to rely on limited information provided by the company itself and perhaps third parties like Standard & Poors, and Lippers.Not all returns go to the Unitholders
A unit trust fund is a business. It has its own expenses and other overheads to service. Salaries, commissions, overheads need to be paid. So, there is the possibility of not all returns of investments go back to the unit holders.
What do I think about unit trust investments?
For me, managing money on your own is still the way to go, provided you have the time and the skills. Nothing beats having the investing/trading knowledge yourself. The fund managers are human like you and I. So, it is rather easy to match or even beat their performance.
However, if you haven’t got much knowledge on investing and trading, but you’re interested in equities, then unit trust funds might be a wise start. Better something than nothing at all right?
I only maintain my unit trust investments in Malaysia due to the fact that I’m not currently in Malaysia and haven’t got the time to track the Malaysian market. In Australia however, I do make my own investment decisions.
Some Unit Trust Companies:
1. Public Mutual
2. CIMB Wealth Advisors
3. CMS
4. MAAKL Mutual
5. PNB
6. Pacific Mutual
Disclaimer: This article is not a specific nor general advice on managing or investing your money. This article does not constitute a recommendation nor does it take into account your investment objectives, financial situation nor particular needs.
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Other related posts:
– Risk Tolerance Level
– Risk Tolerance Level: Part 2
– Back to Basics: Recovering from Negative Returns
– Fund’s Strong Performance
– CFD Trading : An Introduction
– The Importance of Cash Flow
