Unit Trusts (UT) are a form of investment which became really mainstream in the 90s although the first fund in Malaysia was in 1959 & the 80s saw many investing in Amanah Saham Nasional (ASN). UT investments pool collectively funds from investors which are invested by the fund manager. The UT portfolio usually consists of a combination of shares, bonds, commodities, cash & properties.
Unit Trusts (UT) or mutual funds allows funds to invest and hold assets for the individual unit owners. The UT is set up as a trust deed with the investor being a beneficiary of the trust.
Types of UT
- Equity Funds: the most common type of UT focused on equities (shares) of listed companies. May be classified as higher/medium/lower-risk and investing in Malaysia and/or internationally.
- Balanced Funds: invests in a diversified portfolio typically consisting of equities, fixed income securities and cash.
- Fixed Income Funds: invests in government securities, corporate bonds and money market instruments with the objective of providing regular income.
- Shariah Funds: invests in Shariah compliant investments. Non-Islamic banking, insurance, gambling, alcoholic beverages and non-halal food product companies are excluded.
- Index Funds: a type of Unit Trust that invests in a similar portfolio of a stock exchange. For example the S&P500 or KLSE Bursa. Costs are lower for index funds as less research & manpower is required for investing in an index fund.
- Private Retirement Schemes: A long term unit trust investment for retirement purposes. see PRS.
- Exchange Traded Funds: see ETFs
- Real Estate Investment Trusts: see REITs
Unit Trusts Pros
- Arguably less monitoring required & expertise from a fund manager.
- Low investment amount starting from as low as RM100 & RM1000 from EPF.
- Dollar cost averaging investing provides a disciplined approach to investing.
Unit Trusts Cons
- Often very high sales charges (up to 5-6%) & annual management fees (~1%+).
- Market laggards dropping faster when the market drops & recovering slower when the market recovers (versus shares).
- Lack of zero sales charges index-traded funds.
Should I invest in UT?
Consider the following criteria for investing in UT.
- You have considered & do not wish to invest in shares directly or through Exchange Traded Funds.
- You want to withdraw as much of your funds as possible from EPF & expect above 6% returns from your UT investment.
- You want to invest for the PRS tax and/or youth incentives.
- You want to practice dollar cost averaging to invest (or self/agent monitoring & re-balancing your funds well with switching when necessary).
- You are willing to do some research at least when you start and review annually your UT investments (or have a good PF Advisor to help you).
What should I look for in UT?
- If you are investing from your EPF Account 1, ensure that the UT is on the EPF MIS approved list.
- Look for low (preferably close to zero) sales & annual management charges as fees reduce your returns significantly. Consider the expense ratios & ‘hidden’ costs.
- Check for long-term (5 year above) excellent historical info on Lipper (Total Returns, Consistent Returns, Preservation, Expenses)
- Private Retirement Schemes (PRS)
- Lipper UT research & details of ratings: www.lipperleaders.com
- Invest in the best UT to meet your needs at lower fees.
Q: Are UT funds from insurance companies better/worse?
A: Unit trusts from insurance companies are generally not a popular choice as insurance is rightly viewed for protection purposes and not for investing. With that said though, UT from insurance companies may perform better than some other UT funds out there. An added advantage is that UT from insurance companies are usually less volatile as many people buy them linked to the insurance policies and there’s less selling even during market downturns.
Q: How do I buy UT at lower costs?
A: Online discount brokerages including offered through our advisors are a good choice for most UT in Malaysia at a lower cost.