About Unit Trusts
A trust has been described as: “…the relationship between a person and persons called the trustee(s) who owns or holds property… for the benefit of another person or persons called beneficiaries.”
When the interest of the beneficiaries is divided into units, the trust is called a unit trust. A unit trust is therefore simply a vehicle for pooling the investment resources of a number of individual investors.
The unit trust is constituted through a document known as a Deed which brings together and binds the various parties to the Deed.
Investors with common investment objectives pool their savings into a Fund managed by professional fund managers. A unit trust fund is normally a medium to long term investment vehicle.
The Fund will be invested in a diversified portfolio of equities, fixed income instruments, and other assets in accordance with the objective of the Fund and as permitted by the Deed and the Guidelines.
Therefore, a unit trust will provide investors with the opportunity to invest in a well-diversified portfolio of investments, which they would not have been able to as an individual investor.
The benefits of investing in unit trust include:
Diversification involves spreading investments across a broad range of different asset classes to reduce risk. A mixture of cash, fixed income instruments and shares means that the effect of temporary downturn in a particular asset sector will have less effect on the overall returns. Unit trust funds provide you the advantage of diversification, which may not be available to you otherwise.
Professional Fund Management
The professional fund managers make investment decisions based on extensive ongoing research of various factors such as economic trends, market trends and financial strengths of the company they invest in. Professional fund management has long been available to large institutions and high net worth investors. Unit trust funds make this kind of financial expertise accessible to everyone.
With unit trust investments, the manager is obliged by law to repurchase your unit trust investments when asked by you to do so. You may redeem all or part of your units on any business day. This element of liquidity is a very important consideration and benefits that unit trust investments have over other forms of investment.
Security – Independent Trustee / Custodian
Your interests are protected by the provision of an independent trustee (who acts as a custodian) to hold the fund’s assets for them and oversee their interests on an ongoing basis.
You are relieved of substantial administrative burden and time spent in direct research, trading and managing of the funds. These duties will be conducted by the manager. You will be relieved from the tedious task of keeping records on managing stocks and shares, investments research, and market analysis.
Potential Medium to Long Term Capital Gain
A unit trust investment can be used to provide for longer term needs such as children’s education or better retirement savings. By investing in securities, unit trust investment provides the opportunity to reap capital gains (if any) as part of the returns on your investments.
Low and Affordable Capital Outlay
You are usually needs only a small initial capital (e.g. RM1,000) to invest in a professionally managed portfolio of many securities held by a unit trust fund as compared to a usually higher amount needed for investing directly into the capital markets, and enjoy the same benefit accorded to others when investing in high-priced securities. Furthermore, additional investments in unit trust fund are usually made in even smaller sum (e.g. RM100).
Due to price fluctuations of securities invested in by the funds, the value of a unit trust investment may go up as well as down. The movement in securities prices is influenced by a number of factors, which include changes in economic, political and social environments.
Specific stock risk
Risk that is specific to a stock and is not correlated with the specific risks of other stocks. Examples of such risks are poor management due to departure of key management staff, loss of market share to competitors due to changes in the environment, and shifts in consumer demand due to changes in fashion and taste.
Any price fluctuations due to specific risk, of securities invested in by the funds, will affect the NAV of the funds. However, specific risk can be mitigated through portfolio diversification.
The purchasing power of income received from unit trust investments may not keep pace with inflation.
The stock prices may be affected by the political and economic conditions of the country in which the stocks are listed. Unexpected events may stop the fund manager realising the full value of assets in those countries.
The price or value of units in a unit trust fund that invests in the equity markets fluctuates with the value of the underlying portfolios. Therefore when you borrow money to finance the purchase of units in a fund, there is a risk of capital loss. This is because you may either be forced to provide additional funds to top up on loan margins when the market goes down, or when interest rates go up you may be burdened with higher cost of financing.
Return not guaranteed
The income distribution is not guaranteed. There is a risk that there may not be any distribution of income for the particular fund.
Applies to debt-type investments such as bonds, debentures and fixed income instruments. The institution invested in may not be able to make the required interest/profit payments or repayment of principal.
Interest rate risk
Applies to fixed income securities, where the value of the investment may go up as well as down resulting from interest rate movement. The interest rate risk is a general economic indicator that will have an impact on DMP and PAXJI. It does not in any way suggest that DMP and PAXJI will invest in fixed income securities which are not approved by the Shariah.
Poor management of a fund by the Manager may cause the fund to decrease in value, which in turn may cause the capital invested by a unitholder to be at risk.
Risk of non-compliance
The risk that the Manager and others associated with the fund did not comply with the deed of the fund, the law that governs the fund, or the internal policies, procedures and controls. The non-compliance may expose the fund to higher risk that may affect your investments.
There is a wide and ever increasing range of unit trusts available. Funds are classified as into different sectors depending on the objective of the funds.
Different combinations of the above factors will lead to differing levels of risk. In today’s competitive environment, there is practically a unit trust fund that caters to every level of risk tolerance for each individual investor. Hence, there is a fund for everyone.
The type of fund you choose will be dependent upon your investment objective, time horizon and risk tolerance (i.e. the amount of risk you are prepared to take). An investor seeking security and stable income streams should opt for an income fund where the associated risks are lower. A more aggressive investor who is relatively younger, of good health and with no dependents should opt for a either a balanced or growth fund where the associated risks are generally higher.