Investment 101: Getting to know unit trust
Hey guys! I’m starting a new monthly series called Investing 101. For the first six months, I’ll be discussing different investment options, one at a time. We’ll start off with unit trust and then move on to retail bonds, shares, robo-advisors, gold, and real estate. For each investment option, I hope to cover these important areas, with examples where applicable:
1. What is it?
2. What is the minimum investment?
3. What are the fees or charges involved?
4. How do I earn a return?
5. What are the main risks involved?
6. How actively do I need to be involved?
9. Who is it suitable for?
Though this series can come across as dull and isn’t as light-hearted as some of my other content, it is quite an important one to include because planning for the future is part and parcel of adulting. Saving is important, but so is investing. Putting money aside in fixed deposits may not generate enough return to beat the effect of inflation. If your money grows at a rate of 2% while inflation is 3%, that essentially means that the real value or purchasing power of your money falls by 1%. So we need to explore other investment options to earn better return.
Let’s start off with unit trust (UT).
What is it?
It’s a collective investment scheme. UT funds pool money from many investors and buy assets such as stocks and bonds. So when you buy units from a UT fund, you are buying a share of all these investments. There are different types of UT funds including equity funds, bond funds, and balanced funds. Equity funds invest primarily in stocks, bond funds invest primarily in bonds, and balanced funds invest in both stocks and bonds.
What is the minimum investment?
This differs across different UT funds. The minimum investment is usually between RM 100 to 1,000.
What are the fees or charges involved?
Fees include sales charge, management fees, trustee fees, and redemption fees. Check out the Fund Factsheet for detailed information on charges. Here are a few things to take note of:
Check out the fund’s annual expense ratio. This tells us in percentage, how much of the fund’s assets go toward paying the fund’s operating expenses such as management fees, trustee fees, etc. Higher expense ratios basically mean more of the fund’s assets are used to cover expenses, resulting in less return for investors (click here to learn more).
Watch out for high sales charges. This is often not a one-time charge. In most cases, sales charge is incurred every time you buy additional units from a fund. Example: Say you invest RM 100 a month buying units from a particular fund, with a sales charge of 3%. After the sales charge of 3% is deducted, you finally end up investing only RM 97 per month.
Redemption fees. This is incurred when you want to cash out your units. Preferably, opt for 0%.
How do I earn a return?
With UT, you purchase units from a fund at a certain price. If the unit price increases, you can sell your units and reap a profit. Additionally, some funds provide income distribution to investors (sort of like dividend pay-outs to shareholders). This income may be reinvested into additional units. Check out the product highlights sheet for more detailed information on past income distribution.
What are the risks involved?
The fund’s future performance is not guaranteed. The fund managers may not always get it right in terms of the assets they buy on behalf of investors.
How actively do I need to be involved?
UT funds are managed by fund managers who decide what assets to buy. Pick a good performer with a relatively low expense ratio and a well-diversified portfolio of assets (for e.g. the fund holds stocks across various sectors and/or countries, check out the Fund Factsheet for this information) and the fund manager takes care of the rest. But of course, you will need to assess the performance of the fund, gauge whether it’s earning you the returns you expect, and decide whether to switch to another fund.
UT funds are professionally managed by fund managers.
Some funds provide regular income distribution.
UT funds provide small investors an opportunity to diversify their investment portfolio as they can buy a share of various stocks, bonds, etc.
Different funds offer different levels of risk, so you can choose accordingly based on your risk appetite. Equity funds that invest primarily in stocks are considered higher risk (with potentially higher return) whereas bond funds that invest primarily in bonds are considered lower risk (with potentially lower return).
Some funds have hefty charges that eat away at your investment.
You don't get to decide what stocks or bonds to buy. The fund manager will decide.
Beginners who have little confidence in choosing stocks or bonds and would prefer the guidance of a fund manager. However, try to opt for funds with relatively good past performance, low expense ratios, and 0% sales charge and redemption fees.
In Malaysia, an online investing platform that you can consider trying out is Fundsupermart. This platform is pretty user-friendly. You can browse through different funds and check out loads of useful information including risk rating, past performance, charges, and view important documents such as the fund factsheet to choose the fund that's right for you.
You can also buy unit trust through agents or banks, but it may be cheaper and more convenient to do this online (click here to learn more).
In other countries, you may find mutual fund instead, which is somewhat similar to unit trust. Do try to explore the different investment platforms available to you.
If you have any questions, feel free to leave a comment below and I’ll answer as best I can. See you guys again in Part 2!