Unit trust is a type of collective investment that allows investors with similar financial goals to pool their money and invest it in a portfolio of assets. Asset classes such as Cash, Bonds & Deposits, Shares, Property, and Commodities may be included in this portfolio.
The securities in the portfolio are not purchased directly by investors or unitholders; rather, the fund’s ownership is divided into units of entitlement. As the fund’s value rises or falls, the value of each unit rises or falls in lockstep. The number of units possessed is determined by the amount of money invested as well as the current unit price.
The return on investment in a unit trust is usually in the form of dividends and capital appreciation, which are obtained from the unit trust fund’s underlying investments. Each unit earns the same amount of money, which is decided by the amount of distribution as well as capital appreciation.
The main advantages of investment into a Unit Trust fund is the reduction in investment risk by way of diversification as well as having approved professional investment managers manage the funds.
Unit trust investments generally tend to invest in a range of individual securities. However, if the securities are all in a similar type of asset class or market sector then there is a systematic risk that all the shares could be affected by adverse market changes. To avoid this systematic risk, investment managers may diversify into non-correlated asset classes. For example, investors might hold their assets in equal parts in equities and bonds.
As Unit trusts are a collective investment scheme, investors can start with an investment amount as low as RM100.
When you invest in a unit trust, you are automatically diversified throughout the portfolio’s huge number of investments. This means that even if one of the companies does not perform as well as you had hoped, the returns from the other companies in the portfolio will compensate.
Most investors prefer liquid investment. This means that you can easily return your investment to cash You can usually enter or exit your investment on any business day. When you choose to buy or sell a unit trust, you will take the next available price at the end of the trading day.
Unit trusts fund managers are licensed professionals in a highly regulated industry. Their license, background and expertise ensure that decision making is structured and according to sound investment principles. In the long term, it is this expertise that should generate above average investment returns for unit trust investors.
It can be difficult for individual investors to gain exposure to a particular asset class. For example, if an investor wants to invest in the real estate, global equity and fixed income markets at RM20,000, it is not possible to hold a direct investment portfolio in all of these markets at the same time. However, when investing in unit trusts, RM20,000 can be allocated to all of these asset classes at the same time, allowing investors to achieve their desired investment exposure.
If one investor were to buy a large number of direct investments, the amount they would be able to invest in each holding is likely to be small. Dealing costs are normally based on the number and size of each transaction, therefore the overall dealing costs would take a large chunk out of the capital (affecting future profits). Pooling money with that of other investors gives the advantage of buying in bulk, making dealing costs an insignificant part of the investment. In addition, since the fund managers invest in larger amounts, they are able to get access to wholesale yields and products, which are impossible for the individual investor to obtain. For example, unlike unit trust funds, most individual investors cannot have direct access to the Malaysian Government Security market because, amongst other reasons, the amount of each transaction could run into millions of Ringgit.
With the introduction of unit trusts in Malaysia came regulation from various regulators, especially the Securities Commission. The entire range of variables relating to the unit trust industry is governed by various legislations. The sole purpose of such regulations is to protect the interest of the investing public. Regulations provide investors with a level of comfort that they are investing in a safe investment mechanism.
