According to The Bank of East Asia [2006,Wealth management] , unit trust is refer to a collective investment scheme pooling money from individual investors, by using a large portfolio of securities ( e.g. equities, bonds, currency and other financial instruments) managed according to pre-set investment objectives by professional fund management company.
From the definition above, unit trust can be defined as pooled resources of thousands of investors who have entrusted their money to a fund management company. The fund management company buys shares in a range of different companies and pools them into a fund; investors then buy 'units' from this fund. Because of the fund contains a range of shares from different company, so the risk of the investment is spread. The unit trust fund is 'open-ended' - which means the number of units rises and falls as inventory buy and sell units.
The success of a unit trust depends on the expertise and experience of the fund management company. Common types of investments undertaken by unit trusts are property, securities, and cash equivalents.
How do Unit Trust works?
Many individuals cannot accumulate large enough pools of money to give them access to an expensive service or product. With the pooled resources the fund management company able to obtain something that is almost impossible for individuals - blue chip shares. Blue chip shares are in highly demand and expensive. Examples of the blue chip shares are GENTING BHD, BERJAYA SPORTS TOTO BHD, and TELEKOM MALAYSIA BHD. The high price of these shares prohibiting individual investor from purchasing them. A golden key to unlock these riches is by using an investment instrument named unit trust.
The fund management company buys a range of shares from different company on behalf of the investors and combines it into a fund. The fund management company does not give the shares directly to the investors, but combines them in a portfolio. The fund management company then divides the portfolio into many equal 'units'. The investor receives a certain number of units for the money that he/she has entrusted to the fund management company who manage the unit trust.
Anyone who interested can buy units by investing a single lump sum (single payment of money) or by investing on a regular monthly basis. In most equity or share investment there is always an element of risk. Fluctuations (change or variation over time) of share prices cause the risk and are also responsible for their increase or decrease in value.
However, the fluctuations in unit trusts are often not so severe because the trust is shared by different range of shares so the risk of it is spread. Shares that show a stable or better performance cushion the drop in price of other shares. This is especially the case with the general unit trusts, where risks are lower than in the specialist trust because the general unit trusts gain exposure to more sectors.
Unit trusts are not insurance products. Many insurance companies who market life assurance, retirement annuities and other related products, also act as management companies for unit trusts. Along with life assurance, retirement annuities, etc., unit trusts fulfill a very important role in the individual's portfolio.
Advantages of Investment in Unit trust
Low minimum investment with many choices
With a minimum investment amount, an investor can invest in a wide array of securities through funds. For instance, an equity fund usually holds at least 40-50 stocks, and for some unit trusts, which have larger asset sizes, they may hold over a hundred stocks.
Access to global investment opportunities
Through unit trusts, the investment horizon can be broadened because there are different types of funds which can provide investors with a very convenient and cost-effective way to capitalize on both local and overseas investment opportunities. With unit trusts, an investor can avoid being bogged (stuck or get in trouble) down in a particular market or by a particular type of investment.
Diversification
Diversification may take different forms, e.g. along geographic or industry lines, or among different securities or issuers. The essence is that by investing in securities that have a low correlation, a portfolio can help an investor spread out risk and achieve a better risk return behavior than individual securities.
Access to professional investment management services
With unit trusts, an investor can enjoy the services provided by fund managers. Fund managers can help research and analyze the markets and securities for the funds. Fund managers determine which securities and investor should hold, and when to buy or sell. They make decision based on extensive research into the performance of individual stocks or other security issues, as well as the fundamentals of the economies and market trends. With this , investors are able to relief from time consuming and difficulties of study and picking specific fund.
Convenience
If investing in individual stocks directly, an investor has to handle custody and administration for each and every single stock. However, with funds, the investor enjoys 'one-stop' service as investor can invest in a range of stocks, also investor able to save cost of arrange payment, settlement and other related administration work for each individual stock. With the convenience of technology, investor are relatively easy to buy funds, investor can buy funds through internet, bank, independent financial advisors or direct from fund houses.
Category of Unit Trust
The basic feature of unit trust investment is a form of collective investment that allows investors with similar investment objectives to pool their saving, and invested in a portfolio of securities managed by investment professional.
We can classify 5 mains categories of unit trust funds in Malaysia:
Equity Fund
An equity fund is defined as a unit trust fund that invests primarily in shares/stocks. Such fund is typically held either in stock or cash, as opposed to Bonds, notes, or other securities. This may be a mutual fund or exchange-traded fund. The major portions of equity fund portfolios are shares of listed companies. It's available in the market with higher risk-higher return to those with lower risk-lower returns.
·Aggressive growth fund - generally invests in companies with higher capital growth, but with higher risk.
·Index fund- normally the return will closely resemble the performance of the stock market index, both in terms of risk and return. (Variable risk and return depends on the market situation) (Ezine articles, 2010, Types of unit trust funds in Malaysia)
·Income fund - the fund will invest primarily in stocks that earn significant dividend income, rather than companies that are expected to pay little or no dividends.
The objective of an equity fund is long-term growth through capital appreciation, although income distributions and interest are also sources of revenue. Specific equity funds may focus on a certain sector of the market or may be geared toward a certain level of risk.
Stock funds can be distinguished by several properties. Funds may have a specific style, for example, value or growth. Funds may invest in solely the securities from one country, or from many countries. Funds may focus on some size of company, that is, small-cap or large-cap.
Fixed Income Fund
A bond fund pools money from many investors to buy individual bonds and other debt instruments that meet the fund's investment objective-fixed income, mainly invest in corporate bonds, government securities and liquid securities. These funds are professionally managed so it is dependable and limit the amount of risk of investortakes on. Generally it will provide regular income with less emphasis on capital growth, although it could mean a lesser return with the regular income, but that would be possible in a more risky fund.
Balance Fund
A balanced fund is a unit trust fund that invests in a balanced mix of shares/stocks and debentures to provide both income and capital appreciation while avoiding excessive risk in another word that Balance fund is an investment between Equity fund and Fixed Income fund. It is suitable for investors who are looking for a mixture of safety, income and modest capital appreciation. The purpose of balanced funds is to provide investors with a single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss; the flip side, of course, is that balanced funds will usually increase less than an all-stock fund during a bull market.
Property fund
Property funds are mutual funds that invest in real estate. Funds generated from sale of investment units are reinvested in the property fund and used to purchase or lease more residential and commercial properties and developments for the fund. The fund returns are generated from rental income and capital appreciation. Rental or sale fees generated by from the fund's properties are distributed to the investors. Property funds generally are closed-end funds with a limited number of shares, and some may be listed on stock exchanges, as the assets are highly illiquid.
Islamic fund
The Islamic unit trust schemes are collective investment funds which offer investors the opportunity to invest in a diversified portfolio of Shari'ah-compliant securities which are managed by professional managers in accordance with the Shari'ah. Main objective is to invest in a portfolio of halal stocksNon-halal stock - companies produce or involved in activities, products or services and financial services, gambling, alcoholic, beverages and non-halal food products. The Islamic unit trust schemes are required to additionally appoint a Shari'ah committee or a Shari'ah adviser to ensure that their operations are in accordance with Shari'ah.
Conclusion
Unit trust investment is one of the many ways to increase investor retirement fund and maximize investor gain and minimize risk along the period of investment horizon towards retirement age-which is considered a valuable long term investment. By having good understanding of Unit trust, investor now are able to evaluate the funds to invest by the help of the fund management company with the consideration of investment objectives and risk tolerance level.
