Saturday, 7 May 2011

Different categories of funds .

Unit trust funds are also known as mutual funds. These funds fall into 5 primary categories:
  1. Equity funds, also called growth funds. They invests primarily in stocks up to 95%. Meant for aggressive-risk investors. Has higher volatility and risk-return rewards.
  2. Income fund, also called bond funds. They invest primarily in corporate or government bonds and debentures up to 90%. Meant for conservative-risk investors. Low volatility. However, if the bonds are forfeited due to non-performance, the fund will also experience loss.
  3. Balance funds invests in BOTH stocks and bonds usually in the ratio of 60% :40%. This type of fund is suitable for moderate-risk investors. Medium volatility is due to lesser exposure to stocks.
  4. Money market funds. They make short-term investments (usually of less than 365 days) and meant for temporary "parking" the liquid funds whilst waiting for opportunities to invest or to sit out a volatile market.
  5. Capital Guaranteed funds are funds that invests primarily in bonds and have a little exposure in stocks in the approximate ratio of 85% : 15%. These funds are usually open to subscription for a limited period of 30 days only. Investors are expected to lock in their investments for a minimum of 3 years to enjoy the capital guarantee feature.
    Every fund in each category has a net asset value (NAV) and each NAV differs daily. The price changes once a day, at
  6. All transactions for the day are executed based on the NAV. The Managers will SELL the units to you based on the NAV plus a Service Charge of between 3% - 10%. They will BUY your units back from you at the NAV price.

Affordable.

Small capital start-up.
A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. Each investor (unitholder) thus gets an exposure to such portfolios with an initial investment as little as RM500/-. Thus it is affordable for an investor to build a portfolio of investments through a mutual fund rather than investing directly in the stock market.

By investing regularly through a bank debit program, an investor can build on the initial investment and accumulate his/her investment steadily. The more you have invested, the greater your potential for future growth. The fund managers credits the units each time they receive your investment and also rolls over distributions into new units into your account. 

Dollar cost averaging
When you invest on a regular basis, you’re using a strategy called dollar cost averaging. By adding a similar amount of money on a regular basis you can reduce your cost per share in the fund below the actual average cost of a share over the period you invest.

There’s no guarantee you’ll make money with dollar cost averaging. If the fund price declines and doesn’t bounce back eventually, you could lose some of your investment. But in general, dollar cost averaging can reduce the risk that you’ll invest all of your assets at the market peak.

Equity / Growth funds

For the more aggressive investor.
The objective of equity funds, also called growth funds is to provide capital appreciation over the medium to long term. In our local (Malaysian) context, funds of this category generally invest up to 90% - 95% of its Net Asset Value into stocks and shares of companies listed or unlisted in the KL Stock Exchange or otherwise known as Bursa Malaysia. There are currently more than 900 stocks listed in Bursa Malaysia.

This category of funds will usually have at least 5% in cash or cash-related assets to meet redemption requirements. (Redemption means cashing-out by an investor). Growth schemes are ideal for investors who have a long term outlook of the market and am seeking growth over a period of time. 

In Malaysia, Growth Funds has further developed into:
i. Blue-Chip Growth Funds,
ii. Small-Cap Growth Funds,
iii. Sector Growth Funds,
iv. Index-linked Growth Funds.
v. Global Growth Funds.

Growth Funds are suitable for the Aggressive Risk Investor who is willing to take extra risk in order to have a potentially higher capital gains reward. This type of fund can be very volatile due to the high exposure of its' assets in stocks and shares trading.

Balance funds

For the moderately aggressive investor.
The objective of balance funds (also called mixed asset funds) is to provide both growth and regular income to the investor. Such schemes periodically distribute a part of their earning as income to the unit holder.

They generally invest up to 60% of its Net Asset Value into stocks and shares of companies listed or unlisted in Bursa Malaysia. With the rest of the NAV going into cash deposits or fixed-interest securities like bonds, government securities etc. The risk exposure is therefore reduced in the event of adverse share-market correction since only up to 60% of the NAV is exposed to stocks and shares.

In a rising stock market, the NAV of these schemes may not normally keep pace with the rise. Likewise,  when the market falls it will also not fall at the same pace. Balance funds are suitable for investors looking for a combination of income and moderate growth over the medium to long term (i.e. 3 to 5 years and more). 

In Malaysia, Balance Funds can be further sub-divided into:
  • Balance Growth Funds,
  • Balance Income Funds.
  • Balance Global Funds.
  • Balance – Emerging Markets.
  • Balance – Syariah.
This simply means that the choice of stocks and shares are of growth-biased companies or of income-biased companies. The former giving a greater potential of capital appreciation.
Balance funds are appropriate for the Moderate Risk Investor who is willing to forgo the higher potential capital gains reward in order to have lesser volatility in his/her investments.

Income / bond funds

For the conservative investor.
The objective of income funds is to provide regular and steady income to investors.
Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income.

Some risk to such funds are when the bond issuer defaults.

Capital guaranteed funds

For the conservative investor.
This type of funds usually requires you to invest for a period of 3 or 5 years. At the end of the period, your capital is guaranteed.
Capital guaranteed fund is a hybrid fund consisting of bonds which will “grow” to 100% of your capital upon maturity and a small portion in equities to give the fund the “profit”. Unless the bonds issuer defaults, the capital is sure to be preserved.