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 5 pm, when the markets close for the day.
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.

Money Market Fund

 Parking money while waiting for the right opportunity

The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income to the conservative investor.

It is also ideal for corporate and individual investors as a means to park their surplus funds for short periods of even 1 day, whilst waiting for the right opportunity. There is no service charge nor redemption costs.

These funds generally invest in short-term instruments (less than 365 days) such as treasury bills, certificates of deposits, commercial papers and inter-bank call money. Returns on these funds fluctuate depending upon the interest rates prevailing in the market.

Profiting from unit trust

A unit trust fund will make money from two aspects:

1. by earning dividends (from stocks) or interest (from cash/bonds) and  
2. by selling investments (stocks) that have increased in price and bond maturities.

The fund may distribute or pay out its profits to you and its other investors according to the fund’s declared distribution policy. Some funds’ policy is to pay out earnings yearly, some will pay out half-yearly. Some funds specify that it does not intend to pay out the profits but let the gains accumulate in the NAV.

Payouts when done, is usually carried out in two ways:

1. by way of income distributions. When an income distribution is made you will receive money from the fund. However, you could elect for this money distributed to be reinvested for more units. Following an income distribution, the NAV of the fund decreases.
2. by way of unit splits. The investors’ total number of units in the fund increases but the total NAV remains the same.

As a unit trust investor, you have made profits IF your REDEMPTION value i.e. total number of units X NAV is higher than the amount of your Initial Investment.

Costs of Investing.

Front Load Service Fee.This is a front-end fee that Unitholders have to pay. The fees normally range between 5%-10%. This charge is also known as the “spread” between the Sell Price and the Buy Price. The bulk of this fee is the agents' commission.

For example, if the spread is a 5% service charge, it means that if you applied to invest RM100,000 into a fund, RM5000 will be deducted as service charge and the balance of RM95,000 will be invested. The RM95,000 is known as the Net Asset Value (NAV).

Management fee.This fee normally ranges from 1% - 1.5% per annum of the NAV of the Fund and is used to cover the costs of managing your investment. It is used to pay for Administrative costs as well as to pay the Investment Managers. This cost is calculated and accrued daily from the NAV of the Fund and payable monthly to the Fund Manager irregardless of the performance of the Manager.

Trustee fee.

This fee normally ranges about 0.07% per annum of the NAV of the Fund with a minimum charge of RM18,000 per annum. This fee is used to pay the Trustee for their services, which is primarily to keep watch that the fund is being managed according to the guidelines set out in the Trust Deed. This cost is also calculated daily and is deducted from the NAV of the Fund.

Fund expenses.

This includes audit fee, tax fee and administration expenses like printing of prospectuses, interim and annual reports, distribution cheques, postage, printing and other services properly incurred in the administration of the fund. These costs are paid out of the fund’s assets.

Net asset value (NAV)

What's a unit worth?

A fund’s net asset value (NAV) is what the fund is actually worth. It is measured by dividing the total value of the fund’s by the total number of units in circulation.

NAV = Total Value of Fund
  Total Number of Units in Circulation.

A fund's NAV increases when the value of its holdings increases. For example, if its investments are worth $100 million today, but were worth $95 million a year ago, its NAV will be higher if the number of units has remained constant.

Potential risks.

There is no sure profit in unit trust investing or any other investing.

There are risks involved and by being aware we can begin to find ways to manage these risks rather than avoid them. Some of these risks are:-

• Market risk. Unit trust managers buys stocks and shares. The prices of stocks can fluctuate in response to the activities of individual companies, and general market or economic conditions. Such fluctuations in the values of stocks and shares will cause the Net Asset Value of the Fund to fall as well as rise. You stand to lose money when the share market falls.
• Interest rate risk. Generally, bond (fund) prices move in the opposite direction of interest rates. If interest rate rises, bond prices falls. This will lower the value of your investment.
• Credit risk. A fund could lose money if the issuer or guarantor of a fixed income securities is unable or unwilling to make timely principal and/or interest payments.
• Investment manager risk. Poor investment management will result in the loss of capital invested. Changes in a fund’s management may also affect whether a fund achieves its objective. The fund management company may replace a fund manager or the fund manager may resign. This change may be significant since the manager controls the fund’s investments.For example, an equity fund that has realized modest gains under one manager may become more volatile if the fund’s new manager seeks more robust growth.
• Country risk. The prices of securities are also affected by the political and economic conditions of the country. With the recent popularity of global funds, investors should take note that global funds may be affected by risks specific to the country which it invests. Such risks include changes in a country’s economic fundamentals, social and political stability and foreign investment policies etc. These may have an adverse impact on the prices of securities of listed companies.
• Currency risk or foreign exchange risk.This is a risk associated with investments denominated in foreign currencies. When the foreign currencies fluctuate in an unfavorable movement against Ringgit Malaysia, the investments will face currency losses.
• Syariah non-compliance risk. The Syariah-approved securities invested by the fund may be reclassified by the Syariah Advisory Council of the Securities Commission as syariah non-approved securities. The fund's performance may be affected as the fund has then to dispose all such investments that have been reclassified.
  

Research & Evaluation

Get the facts before you act.

When you’re evaluating a unit trust fund because you’re thinking of buying or you’re evaluating whether to continue to hold it in your portfolio, there are some big-picture issues for you to consider.

1. is the fund’s investment objective in line with your objective?
2. will the fund help to diversify your investment portfolio.
3. how does the fund compare with other funds of the same category and objective
   
   
   
    Fund Prospectus:
   
   The Securities Commission (SC) requires all unit trust funds to provide a prospectus to all potential investors. Investors are advised to read and understand the contents of the prospectus.
   The Prospectus must explain and give information on the fund including: 
   
   
   • the fund objective,
   • the investment strategy to follow to achieve its' objective,
   • fees and charges of the fund,
   • income distribution policy,
   • switching policy and redemption charges,
   • investment risks involved,
   • how to buy, sell or switch units of the fund,
   • the fund manager and its financial performance,
   • the trustee, its' roles and responsibilities.
   While a prospectus provides all the details of a fund, it also tries to portray the fund in the best possible terms. Smart investors will also use other resources to research the fund and the managers' past performance records before they making an informed decision.

Switching funds

Switching refers to the act of moving your investment in one fund to another fund/funds which are managed by the same fund management company.

There is usually no cost involved in switching from a "loaded fund" to another fund. (most fund managers allow a few free switches in a calender year). However there is a cost involved if you initially invested in a "no-load" fund or "low-load" fund and now want to switch into a "loaded" fund. "Loaded fund" means a fund with an upfront sales charge (from 5% - 10%) attached. Most growth and balanced funds are loaded funds. Note: One  way of knowing whether there is a load  on the fund or not is to look at the Buy and Sell price. If there is a difference, then it is a loaded fund.

Switching is done when there is a change in your outlook of the economic situation and you desire to preserve the profits you have gained or to reduce further losses. Example: If you believe that the stock market has appreciated a lot and that further stock market upside is limited, you will then switch your Equity funds to a Money Market fund.

Alternatively, if you feel that the market has bottomed out and further downside correction is limited, you will then switch your Money market fund back into an Equity fund in order to benefit from the market appreciation again.

What Is Unit Trust?

A unit trust fund is a collective investment scheme, which pools the savings of investors with similar investment objectives in a special "trust" fund managed by professional fund managers. The pooled monies in the unit trust fund will then be invested in a diversified portfolio of securities and other assets in accordance with the unit trust fund's investment objectives and as permitted under the Securities Commission's (SC) Guidelines on Unit Trust Funds.

The investment scheme of a unit trust fund can be illustrated as a tripartite relationship between the manager, the trustee and the unitholders. The manager is responsible for the management and operations of the unit trust fund whilst the trustee holds all the assets of the unit trust fund. The obligations and rights of each of the three parties are specified in the Deed, (a legal document entered into between the manager and the trustee, and registered with the SC). The Deed regulates the duties and responsibilities of the manager and the trustee with regard to the operations of the trust fund and protects the unitholders' interests

Direct investment versus unit trust funds - 'pros' and 'cons'?

Once you have decide to invest, you have a choice of investing directly or through a unit trust fund. Which method is appropriate may well depend on your individual investment needs, however, using professional fund managers can generally provide better returns over the long-term.

Fund managers tend to outperform individual investors because:

• Their portfolios are constructed using a defined and consistent investment philosophy;
• Fund managers have a far greater access to quality information including company contacts, competitors and customers than do individual investors;
• Fund managers employ full-time investment professionals to monitor investment markets and the way economic developments affect these markets;
• The size of their portfolios generally means that fund managers can more easily reduce risk through greater diversification. They can also reduce risk by implementing sophisticated risk-management techniques involving the use of derivatives; and
• Fund managers have the economies of scale to reduce expenses through lower transaction costs. For example, fund managers generally pay much lower commissions to stockbrokers.

Outperformance is just one of the benefits of a unit trust fund

Unit trust funds aim to offer more than just higher returns. Many also provide investors with:

• Complete administration and reporting. This includes the calculation of investment returns and the provision of personalized tax guides;
• Up-to-date commentary on fund performance;
• Specially trained customer service staff;
• Quick and easy access to their funds; and
• Simplicity.

For whom are unit trusts most suitable?

Unit trusts are a simple and convenient investment option for people who have a long-term investment horizon but do not have either the time, desire, or expertise to invest directly in financial markets.

Unit trusts can be particularly suitable for smaller, first time investors as they offer the opportunity to establish a broadly diversified portfolio of assets with a relatively small amount of money.

However, larger investors can also benefit from unit trusts as they provide access to the expertise of professional investment managers.

When you invest in a unit trust fund, your money buys 'units' in that fund, at a price that is struck for that particular day. Over the period in which you invest, the unit trust price will move up and down as the value of the investments with the unit trust fund rise or fall. Returns from a unit trust fund are typically calculated based on movements in the bid (or withdrawal) unit trust price and assume any income distributions paid to investors are reinvested in the fund as additional units.

The Secret to Wealth

Whether you want to invest in shares or across a broad range of asset classes, unit trust funds provide you with one benefit that can be very hard for individual investors to achieve - diversification.

 

Many people invest but only some become wealthy. Why?
The mistake many people make when investing is that they treat their investment as saving.

 

Saving Versus Investing
So what is the difference between saving and investing? Saving is what you do to build up funds for something, like a holiday, and when you have the amount saved you withdraw your capital from your investment and spend it on the holiday. After the holiday you have nothing left, and start the process all over again.

But building wealth is different. People who want to build wealth invest their money for the long term in 'growth assets' such as shares and property.

Their strategy is to spend the income that the investment produces, but to leave the capital invested. They don't withdraw the capital, so it stays there growing and compounding, and producing more and more income each year.

If you do this it will take you quite a while longer initially to get to your investment goal , but in the long run you will find that the extra wait has been worth it. As the years go by, you will have an increasing additional income stream from your investments and your standard of living can rise accordingly!

 

Should I continue to retain capital in retirement?
Retaining your capital is a good strategy to use for wealth accumulation. Of course when you stop working later in life, your strategy may change. At that point it can often be beneficial to start drawing on some of your capital as well, whilst still ensuring that it will last for as long as you need it.

Investment Goal

One of the keys to successful investing is identifying your investment goals, and the time frame over which you will invest.

Investing for a specific goal

When investing money, many people have a specific goal in mind. If this is the case for you, you need to decide what time frame is attached to that goal - short term, medium term or long term?

Examples of investment goals are:

Short term (1-3 years)	- overseas holiday - car - taking time off work to care for a baby
Medium term (3-7 years)	- deposit on a house - boat - a sabbatical or extended break from work.
Long term (7+ years)	- childrens' education - holiday house - retirement/early retirement

Investing a specific amount

Rather than having a particular investment goal, some people may just be wanting to invest a certain sum of money eg. an inheritance. If you are in this situation, you need to decide what you want from that money.

Do you want to use the money in the next year or two? (in which case you are a short term investor). Or do you want a regular income? (you will need medium term income-producing investments). Or do you want it to achieve capital growth over a long period of time, and are willing to take a long term view?

Time Frame

The time frame of your goals will determine how the money should be invested.

A short term investor would be more likely to choose a more conservative investment like cash, to ensure that their capital is available in the next 1-3 years when they need to access it.

A long term investor would be more willing to invest in 'growth assets' such as shares, as they do not need to access their capital for at least 5 years, so are less concerned about short term ups and downs. They recognise that the potential returns are much higher in growth investments, and if they are held over the long term the risk is reduced.

A financial adviser can assist you to understand the types of investment most suitable for your goals.

EPF Calculator

Under this scheme, members can invest not more than 20% of their credit in excess of Basic Savings in Account 1. The minimum amount of savings that can be withdrawn is RM 1,000 and can be made at intervals of three months from the date of the last transfer, subject to the availability of the Basic Savings required in Account 1.

Estimated amount is just a guide as to how much is eligible for investment withdrawal. The actual amount can be obtained from the nearest EPF counters. 

Required Basic Savings In Account 1

Age (Years)	Basic Savings (RM)	Age (Years)	Basic Saving (RM)
18	1,000	37	34,000
19	2,000	38	37,000
20	3,000	39	41,000
21	4,000	40	44,000
22	5,000	41	48,000
23	7,000	42	51,000
24	8,000	43	55,000
25	9,000	44	59,000
26	11,000	45	64,000
27	12,000	46	68,000
28	14,000	47	73,000
29	16,000	48	78,000
30	18,000	49	84,000
31	20,000	50	90,000
32	22,000	51	96,000
33	24,000	52	102,000
34	26,000	53	109,000
35	29,000	54	116,000
36	32,000	55	120,000

Some Examples To Compute The Allowable Investment Amount

Member	Age	Savings In Account 1 (RM)	Basic Savings (RM)	Computation: Savings In Account 1- Basic Savings x 20%	Member's Eligibility
A	22	4,000	5,000	-	Not qualified as the savings is lesser than the basic savings required.
B	22	8,000	5,000	8,000 - 5,000) x 20% = RM600	Not qualified as the savings is lesser than required minimum investment amount of RM 1,000.
C	25	20,000	9,000	(20,000 - 9,000) x 20% = RM2,200	Qualified as the savings is more than the basic savings and minimum limit.
D	40	40,000	44,000	-	Not qualified as the savings is lesser than the basic savings required.
E	45	100,000	64,000	(100,000 - 64,000) x 20% = RM7,200	Qualified as the savings is more than the basic savings and minimum limit.

DOLLAR COST AVERAGING - Illustration