Understanding Unit Trust

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:

Company

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:
Unit Trust

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

About nadlique

This blog is about the journey of a 28-year-old Malaysian towards financial freedom. This blog was started back when the blogger was 21 years old. However, his journey towards financial freedom had begun way before that. Materials such as investing, business, entrepreneurship, equities, and real estate are presented. The author also posts his thoughts and observations on life in general.

Comments

  1. Another possible disadvantage, depending on which country you live in, is tax treatment. The UT may buy and sell many times during the tax year, producing short term capital gains. The tax liability of these capital gains may be passed through to the shareholders even though the actual gains are only on paper.

    It is even possible to have a net loss in share value for the tax year, and yet have a tax liability for short term capital gains.

  2. Very good post on understanding unit trust. It is simple enough and easy to understand. 🙂

  3. I think unit trust investment is a good choice for average malaysian people. The initial investment is affordable – min RM 1000 and you don’t to think much about buying and selling shares, the fund managers will do it for you.

  4. @IASSOS

    Thanks for sharing 🙂

    I think in Malaysia, you will not get taxed until you actually sell your unit trusts. So, the managers might buy and sell many times during the tax year, but as long as you hold on to your units, no tax will be levied upon the investors. I stand to be corrected.

    @ChampDog

    Thanks a lot 🙂

    @Tabuxander

    Yup, you got that right. For an average Malaysian who has a day job, then unit trust would be the best option. Just leave your money there and let the managers take care of it. The low minimum investment is also an attractive factor towards unit trust.

  5. Unit trust industry in malaysia is still operating at a huge margin. sales charge of 5-7% and annual fee of 1.5-2% doesn’t keep up with the lower charges incurred in other countries. In USA, most unit trust has no sales charge and annual fee of only 0.1-0.3%. Singapore is also better. We, Malaysians, do have a choice. I have an account with US-based regulated broker and investing in europe and emerging market ETF (exchange traded funds). ETF is a lower cost option than mutual fund (equivalent to unit trust in Malaysia) if you invest for the long term. I dont have to pay any sales charge for my ETF and merely 0.12% for annual fee.

    EPF is doing the people a favor by proposing that starting from this year the sales charge to be reduced to 3% for EPF investment. However, I’m still waiting for the implementation. Nevertheless, 3% of sales charge and a huge 1.6% of annual fee is still far from what other countries are charging including Singapore.

  6. In Australia as well, the charges are not that high. If I’m not mistaken, some of the costs are rebated back to the customers (always a good thing).

    I think the problem in Malaysia still lies upon the fact that many Malaysian are not sophisticated investors, thus not having a choice in picking which investment vehicles to go for. Either we settle for the under performing vehicles like fixed deposits and perhaps ASB, or go for equity-related funds, that could potentially give you higher returns but of course…. with higher costs.

    So, in the unit trust companies’ perspective, if the demand is still there, why should they lower their prices.

    Plus, there are not many who knows about ETFs, or perhaps investing in instruments located outside of Malaysia, other than of course, through the funds themselves.

    Personally, I do think somebody needs to do something in driving the unit trust charges down. Way down. More people will then be attracted to invest their money. A socially-responsible thing to do.

    Anyway, I heard that the reason why the service charge for EPF members was lowered to 3% was because EPF had “threatened” the unit trust companies. They said that if the service charge was not lowered for their members, they will not allow EPF members to invest in unit trust funds. I do not know whether this is true or not.

    So, yeah, Malaysians do have a choice, but the question is, are the people aware of the choices that are available to them?

  7. People are the victims. Most Malaysians even professionals will settle for usual UT companies like Public Mutual. They think that’s the best and the only option that they have in Malaysia, not knowing that these companies are raking in big bucks, UT agents getting a preposterous 2.5% of commission.

    I’m not trying to insult UT agents out there but as I’ve explained above, fees in Malaysia are way too high. Even a large number of them that I’ve talked to doesnt even know ETF, ETN and so on.

    What even more ridiculous, the no of ETF and passive index fund in Malaysia is very small. Eg. MYETF recently launched and KLCI Tracker Fund by UOB. These passive index fund and etf are designed to cut down on middlemen (UT agent) and ultimately the fee.

    The so-called Index fund by Public Mutual is still charging 6.5% sales charge since they claim they can outperform the KLCI. They shouldnt call it an index fund then. With relentless rules of humble arithmetics, it has been proven over the decades (not years) that actively managed mutual fund will most likely underperform its index tracker, thanks to its humongous fees. People will say that fee is not everything, but Most (>99%) so-called UT professionals in developed countries over the last centuries underperformed the index after the inclusion of fee. You’ll understand what I’m talking about from this article: (I have already read the book. It’s an eye opener.)

    Article Link

    Thats why I really hope that companies like tune money will decide to jump in the UT bandwagon with very low sales charge (none is better) and reasonable annual fee. They’ve announced that they’re gonna have one in 2008 but they are yet to start a UT subsidiary.

    As for me, I am the proponent for things that benefit the people the most. Period.

  8. Joe, very good comment. I don’t aware the service charges are high until you brought it up. Btw, where can I get ETF in Malaysia? Are there any? Anyone know?

    nadlique, tax when you sell? I thought it is taxed during distribution or dividend? It is automatically taxed with the highest margin and later you need to claim back when you file the income tax report.

  9. @Joe

    I might have to agree with you on that. Also, might I add, with us forking out so much in the form of a service charge, we’d expect an excellent service right? But half the time, UT agents don’t even know what they’re talking about. There’s this once, I asked the same question to two UT agents and I got two different answers. There’s also a few times where some UT agents gave me illogical expectations.

    However, don’t get me wrong, there are many UT agents out there who are experts in their field. So, kudos to those bunch of people.

    But personally, I am for the idea of cutting down on costs or even abolishment of charges, and investing in alternatives of unit trust funds like ETF. I will be doing a write-up on ETF pretty soon.

    Thanks for sharing your perspective mate 🙂

    @ChampDog

    Oh yes, I have forgotten about the distributions. I think you will be taxed when you get the distributions, and taxed again after you sell your unit trusts for capital gains.

    You will be taxed with the highest tax rate? I thought you will be taxed based on your income tax bracket? I am not so familiar with the Malaysian taxation system, apologies.

    IASSOS touched on tax on buying and selling of units, so, that’s why I was only thinking of the capital gains tax.

    Anybody out there knows better about this, do share.

  10. All capital gain tax in Malaysia is not taxable based on my understanding. You may want to verify that. 🙂

  11. ChampDog

    Thanks. However, in Malaysia, etf is not always the best option. You can only buy etf through broker. So, you have to pay the broker the commission which is quite huge.

    I know it’s a hassle to open an account in USA but the brokers over there charge very low commission. In my case, I go for NO COMMISSION. Yes, NO COMMISSION. It’s a relatively new broker but backed by a strong company and regulated by US Securities and Exchange Commission. You dont believe it? Therefore, it’s laughable when I heard that Msia’s SC is planning to up the minimum broker’s commission to RM40 this year…

    http://www.zecco.com/Default.aspx

    It’s not difficult to open an account but it takes a little bit more time and understanding of the process to do it.

    Ok. Back to Msia. If you decide to buy an ETF in Msia, currently there’s only 3 ETF in Msia.

    The latest one:
    http://www.myetf.com.my/index.asp

    One equity etf and one bond etf:
    http://www.klse.com.my/website/bm/products_and_services/exchange_traded_fund/

    First, you have to open an account with the local stock broker such as Maybank etc. Learn to trade online as thats where you will get the lowest fee. And the most important thing if you buy ETF in Msia is to go for lump sum investment. I mean like one big lump sum per year. You have to do this in Msia because broker’s commission in Msia is ridiculous (~0.7% per transaction). Therefore, it’s critical that you understand the difference in cost structure between these two investment vehicles.

    Frankly, for Msians who wants to do a regular monthly investment, there’s not much choice out there other YET other than ASB, ASW 2020 or index unit trust that charges small fee.

    Some of you may be surprised that after comparing ASB and Public Mutual Index Fund and taking into account the sales charge and annual fee since 1992(ASB’s annual fee is ~0.35% with no sales charge), ASB’s annualized return is only slightly below the return of Public Mutual Index Fund. Considering that ASB is a diversified fund (equity, bond, etc) with a lower risk than 100% equity fund such as an index fund, I would prefer to put my money in ASB rather than in Public Mutual or I could simply split my capital between ASB and trade super low cost and broadly diversified ETF in USA (which is what i’m doing right now).

    Nadlique,
    If u decide to have an article on etf, make sure that u emphasise on the cost. Like I said above, in Msia, etf is not always the best option YET.

    I’m really looking forward to what tune money could do this year. Until they or some other companies decide to shake things up by coming out with low cost unit trust for Msians, the local UT industry will continue with its hideous way of literally ‘amassing’ free money in broad daylight.

  12. Logan Pillay says:

    Could you please explain to me being a layman how does one go about understanding the performance of unit trusts.

    Can you explain by commenting on the following.All I require to know is which is the best performing fund and the risk rating for each fund.

    I require this to answer 1 question in my assignment at university.

    I look forward to your assistance

    Funds listed by 12 month sell-sell performance. Click on a fundname to view details.

    Rank Fund Type 1week 3mths 12mths 3yrs
    1. Marriott Property Equity Fund
    Flexible Property 0.38% 9.88% -2.82% 25.83%
    2. Stanlib Multi-Manager Flexible Property Fund
    Flexible Property 0.65% 17.69% -3.18% 43.54%
    3. Investec Property Equity Fund
    Flexible Property -0.55% 20.59% -7.70% 62.41%
    4. Coronation Property Equity Fund
    Flexible Property 0.76% 22.68% -8.23% 46.48%
    5. Oasis Property Equity Fund
    Flexible Property 0.93% 16.21% -9.34% 53.87%
    6. SIM Property Fund
    Flexible Property 0.66% 19.73% -9.72% 53.26%
    7. Stanlib Multi-Manager Property Fund (A)
    Flexible Property 0.27% 22.80% -10.30% 51.91%
    8. Stanlib Property Income Fund
    Flexible Property 0.07% 23.58% -10.67% 53.88%
    9. Prudential Enhanced SA Property Tracker Fund
    Flexible Property -0.12% 22.37% -10.74% – –
    10. Absa Property Equity Fund
    Flexible Property 0.47% 22.00% -10.77% – –
    11. Marriott Property Income Fund
    Flexible Property 0.50% 14.57% -11.08% 32.70%
    12. Dynamic Wealth Property Portfolio
    Flexible Property 0.30% 22.61% -11.41% – –
    13. Metropolitan Property Income Portfolio
    Flexible Property -0.44% 21.86% -11.77% 41.28%
    14. Old Mutual SA Quoted Property Fund
    Flexible Property 0.06% 23.04% -12.34% 43.63%
    15. Fidentia Ayanda Property Equity Fund
    Flexible Property 0.17% 25.85% -12.35% 45.94%
    16. RMB Property Fund
    Flexible Property -0.33% 22.28% -14.41% 42.26%

  13. “This blog started 1 year and 23 days ago. I will (hopefully) be financially free in 7 years, 11 months, and 8 days.”

    This what you target in next 7 years. Other than Unit trust, what else you’re investing in to be finacially free?

  14. Apart from unit trust, I own a couple of properties, and I run a private derivatives trading fund. That’s primarily what I’m doing at the moment.

    At the side, I’m running a part-time business and I invest in collectibles.

  15. Actually I work for one of investment bank in Malaysia..And that’s true most of Malaysian not really active investing into stocks market and they prefer to play safe. So they invest in unit trust.. However, I also don’t know that Malaysian unit trust charged such expensive fees.

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