Unit Trusts (UT) are a form of investment which became really mainstream in the 90s although the first fund in Malaysia was in 1959 and 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 can consist of a combination of shares, bonds, commodities, cash, and 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.
Introduction to Unit Trusts
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
- More passive investing compared to direct equities investments leveraging on expertise of fund manager.
- Low investment amount starting from as low as RM100 (cash) and RM1,000 (EPF withdrawal).
- Dollar cost averaging investing provides a disciplined approach to investing.
Unit Trusts Cons
- High sales charges (up to 5-6%) & annual management/expense fees (~1-2%+). (Update: there are now UT EPF and Cash investment with sales charges as low as 0%).
- Requires knowledge on building an investment portfolio and selecting the best performing funds that meet your investment portfolio, risk profile, and asset allocation.
- Requires monitoring to rebalance and switch funds for performance and asset allocation purposes. (Update: there are now managed portfolio options which will automatically handle the rebalancing and switching of funds).
Investing in Unit Trust
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 financial 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 benchmarking and ratings for the funds.
Benchmarking and Ratings
The 2 key benchmarking standards for fund investments are Lipper Leaders and Morningstar. Asset managers, fund companies and financial planners recognize Lipper and Morningstar benchmarking and classifications as an industry standard.
- Lipper Leaders provides publicly available information on: Total Returns, Consistent Returns, Preservation, Expenses (min 1 to max 5 rating).
- Morningstar provides publicly available information on: Performance Ranking, Morningstar Rating, volatility measures, and modern portfolio statistics.
- Arithmetic Mean of Returns: the average returns on the investment calculated as the total of all returns divided by the total period. (higher returns = better performance)
- Standard Deviation: the volatility of the investment of the investment calculated as the square root of the variance to the mean. (lower = less volatile)
- Sharpe Ratio: the performance of the investment in relation to the risk-free rate. (1+ = acceptable, 2+ = good, 3+ = excellent)
Modern Portfolio Statistics
- Alpha: the performance of the investment above its benchmark (higher = better)
- Beta: the volatility of the investment in relation to the benchmark. (<1 = less volatile; 1 = in line with the market; >1 = more volatile)
- R-Squared: the correlation of the investment in relation to the benchmark. (0 = no correlation; 100 = full correlation)
- Private Retirement Schemes (PRS)
- Lipper Leaders UT benchmarking and ratings (lipperleaders.com)
- Morningstar UT benchmarking and ratings (morningstar.com)
- Contact a licensed financial professional to assist you with your UT investment
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 platforms including offered through licensed financial planners are a good choice for most UT in Malaysia at a lower cost as low as 0% sales charges.
Q: What is the difference between Unit Trusts and Mutual Funds?
A: Although often used interchangeably, there is a legal difference between unit trusts and mutual funds. For a unit trust, investor funds are pooled together managed by a fund manager and investors are issued units. For a mutual fund, an investment company issues redeemable shares for an investment.
Q: What is the difference between Beta and R-Squared?
A: While both Beta and R-Squared compares with a benchmark, Beta measures the amount of change compared to benchmark while R-Squared measures the overall correlation compared to benchmark.