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Eight Principles Of Successful Unit Trust Investing

Many people spend years searching for the best way to invest their savings. It was then discovered that managed investment, as in unit trusts, is one of the keys to investment success. Unit trusts are a convenient and sensible way for investors to enter the investment field. Unit trusts can offer you long-term performance, lower risk through diversification and the benefit of investment specialists looking after your money.

In order to make a wise investment decision, you should consider the following eight principles of successful investing in unit trusts:

What Is A Unit Trust And How Does It Work?

A unit trust is a professionally managed investment fund which pools your money with that of many other investors with similar investment objectives. The aggregate sum is then used by the fund to build a diversified investment portfolio which comprises stocks, bonds and other assets in accordance with the investment objective of the fund. The price of a unit reflects its total Net Asset Value, commonly referred to as NAV (the fund’s assets less its liabilities, divided by the number of units in issue). Unlike stocks, whose prices are subject to change at each trade, the fund’s NAV is calculated only at the close of each day’s trading. Hence the fund’s unit price is quoted in major newspapers on the following business day.

To protect your rights and interests as investors, an independent trustee is appointed to ensure compliance of the manager with the requirements of the deed and the Guidelines on Unit Trust Funds issued by the Securities Commission Malaysia. The manager is also required to appoint an approved auditor (within the meaning of the Companies Act 1965) for the purpose of conducting annual audits of the fund’s accounts which must be included in the fund’s annual report.

What Are The General Benefits Of Investing In A Unit Trust?

Diversification – the spreading of risks over a wide variety of securities in different sectors. Normally to do this, you must have a substantial amount of money to buy a diversity of stocks. However, unit trust funds facilitate this by providing small savers with an opportunity to pool their savings to invest in a diversified portfolio of stocks or you could think of it as “not putting all your eggs in one basket”.

Professional Fund Management – your ability to “employ” a team of well-trained, in-house investment professionals who conduct full-time regular investment research and analysis in managing the assets of the fund. With such investment expertise, research facilities and information network, sound investment decisions may be made.

Liquidity – you can redeem all or part of your units on any business day and the manager will purchase them.

Hassle Free – you need not trouble yourself with complicated decision making and arduous paperwork involved in investment in the securities market.

Affordability – you only need a small amount of money to participate in a professionally managed portfolio of investment and enjoy the same benefits accorded to others when investing in high priced securities. At the same time, you can also reap better returns from a portfolio of investment as opposed to the limited number of securities which one can invest individually.

What Are The General Risks Of Investing In A Unit Trust?

Market Risk the portion of risk arising from changes in the economic, political and social environment and affecting the stock market as a whole. Even a well-diversified fund cannot avoid market factors when they are such as to simultaneously affect the prices of all securities irrespective of their sectors and prospects.
Specific Risk or Stock Risk the portion of risk which is unique to the company that issued securities. Specific risk can be associated with management errors, shift in consumer taste, advertising campaign, lawsuits and competitive industry conditions. The risk can be mitigated by diversifying the fund’s investment over more companies in various segments of the economy which operate independently from one another.
Loan Financing Risk the portion of risk which you must consider carefully when taking a loan to invest in unit trusts as borrowing increase the opportunity for loss as well as profit. If the value of your investment falls below a certain level, the bank may require you to reduce your loan balance. Also, your borrowing has an interest cost, which may go up and eat into any gains that your fund makes.
Management Company Risk the portion of risk that the manager may not adhere to the investment mandate of the fund. However, this risk is greatly reduced by the presence of the trustee whose duty is to ensure that the fund’s investment mandate is complied with.
Interest Rate Risk Interest rate anticipation is the most critical factor in any active bond portfolio management strategy because it involves relying on forecasts of uncertain future interest rates. In the event of rising interest rates, prices of debt securities will decrease and vice versa. Meanwhile, debt securities with longer maturity and lower coupon rate are more sensitive to interest rate changes.
Liquidity Risk the portion of risk which is faced by a fund which trades in thinly traded or illiquid securities. Should the fund need to sell a relatively large amount of such securities, their selling price would be greatly lowered due to the selling pressure.
Credit / Default Risk causing a deterioration in creditworthiness, perhaps even a default in the payment of principal and interest.
Inflation / Purchasing Power Risk the risk that the real rate of return from the investment (i.e. the return less inflation rate) is eroded by the loss of purchasing power due to inflation.
Distribution Risk it is not the policy of the manager to guarantee the investment returns or dividend payout to unitholders. In addition, the past performance of a fund is not indicative of its future performance.

The conventional wisdom says you should be willing to accept more risks when you are younger and then gradually shift to safer investments as you approach retirement. But this is only a general rule. There is plenty of flexibility for you to satisfy your individual needs and preferences. To help you choose the most appropriate funds for your investment needs, answer the following series of questions:

“What stage of life cycle am I at now?”
“What are my investment goals?”
“What kind of returns am I looking for?”
“How much risk am I comfortable with?”

Once you have a good understanding of your personal situation, you will be equipped to make informed investment decisions and ready to develop your investment strategy.

    The most important element of your strategy is diversifying your portfolio because you need the right mix of investments to achieve your goals. There are, however, two factors you should keep in mind:

  • Inflation – you will have to protect your purchasing power against inflation.
  • Liquidity – this simply means the ability to quickly get your hands on your money.

The earlier you start investing through regular investment plan, the better the earning potential of your investments. Reasons: The power of compounding or the accelerated rate at which your investments grow over time. The best way to take advantage of compounding is to contribute as soon as you can – as early in life as possible and regularly during the year through a regular investment plan.

Your investments will potentially grow faster if you invest regularly. Reasons : The key benefit of investing in unit trusts through a regular investment plan is dollar-cost-averaging. Dollar-cost-averaging enables you to purchase units at different times and at different market prices, which means you often pay less for your investment than if you made one lump sum purchase. As a result, dollar-cost-averaging generally ensures a greater potential return from your investment.

Historically, unit trusts have provided greater long-term returns and have entailed greater short-term risks than other savings vehicles. Thus, you should balance the risks and rewards of your investment choices. Investments with higher returns potential, such as stocks, often involve greater risks whereas investment with lower risks, such as investment grade bonds, generally earn lesser returns. Unit trusts allow you to reap higher returns over the longer term than other savings vehicles although its market value as reflected in unit prices may fluctuate over the short term.

Diversification through prudent asset allocation among the various funds and other investment assets can help you ride out the bumps in the road. Diversification works because the different investment assets classes have different fundamental characteristics and can move in different directions. For example, when the economy is faltering and interest rates are falling, bonds will usually outperform, whereas when the economy is booming, equities will generally outperform bonds. Diversification increases returns while lowering risks, which is why it is the single most important part of your overall investment strategy.

Monitor your investments on a regular basis to ensure that they still reflect your long-term financial goals and personal circumstances. For example, at one stage in your life, you may be seeking a longer-term investment that focuses on capital growth. Later on, you may prefer a lower-risk investment that places more emphasis on a steady stream of income.

Whatever the reason, making adjustments over time is essential and needs to be incorporated into your investment strategy. Through regular monitoring, you can ensure that your investment portfolio continues to match your long-term objectives.

BIMB Investment Management Berhad (276246-X)
Level 19, Menara Bank Islam,
No. 22 Jalan Perak,
50450 Kuala Lumpur
Malaysia