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FUNDAMENTALS OF FINANCE AND USING UNIT TRUST AS AN INVESTMENT INSTRUMENT

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Date added: 17-06-26


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A unit trust is a form of collective investment constituted under a trust deed. In Malaysia the first unit trust was established by a company known as Malayan Unit Trust Ltd in 1959.Malaysia introduce the unit trust concept earlier than its Asian neighbours. Malaysians can now invest unit trust online opportunely via FundHYPERLINK "http://www.fundsupermart.com.my/main/research/viewContent.tpl?articleNo=593" supermart. Fund supermart provides regular investment update in the form of weekly email newsletter and quarterly magazine only to their investors.

Unit trusts are open-ended investments, therefore the original value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. Each fund has a specified investment objective to determine the management aims and limitations. An investment company which purchases a fixed, unmanaged group of income-producing securities and then sells shares in the trust to investors. The major difference between a Unit Trust and a mutual fund is that a mutual fund is actively managed, while a unit investment trust is not managed at all. Capital gains, interest and dividend payments from the trust are passed on to shareholders at regular periods. If the trust is one that invests only in tax-free securities, then the income from the trust is also tax-free. A unit investment trust is generally considered a low-risk, low-return investment. Some investors prefer Unit Trusts to mutual funds because Unit Trusts typically incur lower annual operating expenses. However, Unit Trusts often have sales charges and entrance/exit fees. It also called fixed investment trust or participating trust or Unit Investment Trust (UIT)

Below are the unit trust companies in Malaysia

Affin Trust Management Berhad,

Alliance Investment Management,

Apex Investment Service Berhad,

ASM Investment Service Berhad,

Avenue One Invest,

CIMB Wealth Advisors,

CMS Trust Management Berhad,

HLG Unit Trust Berhad,

Hwang-DBS Investment Management Bhd.

ING Funds Berhad, MAAKL Mutual Berhad,

OSK-UOB Unit Trust Management Bhd,

Pacific Mutual Berhad,

Pheim Unit Trust,

Philip Mutual Berhad,

Public Mutual Berhad,

RHB Unit Trust Management Berhad,

TA Investment Management Berhad

Characteristics of Unit Trusts

A unit trust is formed when investors invest their savings to form the trust and it gets dissolved when investors withdraw money from it. By participating in a unit trust, investors accrue greater benefits from their investments than what they would have earned from direct investment in company shares. Investment in unit trust comes with higher financial security and greater economies of scale. Investment schemes like unit trusts encourage investors to participate in equity, derivatives, debt, and money markets. Be it a regular income growth or capital growth, unit trust takes care of all types of investment objectives. Unit trusts are preferred due to their easy affordability, and excellent liquidity.

Unit trusts are characterized by following features:

1. These are open-ended schemes of investment

2. Each unit trust scheme comes with distinct set of investment objective

3. These trusts are designed as per the financial limitations of investors

4. Investors investing in unit trusts have ownership in the trust assets

5. Unit trust is managed by a fund manager, who maintains the trust and tries to improve profit level

Unit trusts can be categorized into two different units as follows:

1. Accumulation units are those that accumulate interest and dividend within the trust and add value to the trusts fund.

2. Distribution or income units on the other hand, distribute dividend or interest among the unit holders on a previously fixed date.

3. Creation and cancellation prices of a unit trust do not match with the offer price and bid price at all times. Profit that is earned from the difference between creation and cancellation prices of unite trusts is termed as box profit.

3.0 Advantages and disadvantages

Same as any other investment plan, there are some advantages and disadvantages in investing unit trust.

The advantages of unit trust are:

Convenient and Low cost

Investor will have professional management or expert to do the all the hard work for them in investing and unit trust can start up with a very low cost investing.

Diversification

Means that spreading one's investment among many securities, by doing this its help to reduce the risk and decrease the danger of losing all investment in one time.

Favourable return

Compare to other traditional investment product or plan the average return of unit trust is very favourable and it can easily buy and sell without difficulties.

Transparency and Security

Unit trust are complete transparency in the way that the price are widely published in newspapers and the performance figure are readily available for investor to compare, and it strictly regulated by the Financial Services Broad (FSB).

Flexible Investing option

Investor can choose from fixed monthly investing option, a lump sum or smaller sum of investment. This possible can help smaller investors to start invest relatively small amounts monthly.

Easy Access

Unit trust allows investor to have easy access to a wide range of investments not normally available to them and there are no minimum investments periods.

Increased Buying Power

Investor recourse is shared with each other investor s, allowing investor to make investments impossible as an individual investor.

Affordable

Investor can start with an investment amount as low as RM100.

The disadvantages of unit trust are:

May not suit all investor

The investment plan may involve from medium to long-term investment which may not suit all of the investor, some investor may tempted to cash in their unit trust in the short-term.

Loss of Control

The money invested is not directly decided by investor. If the unit trust fund managers are not professional or expert enough with an investing knowledge this will put investor money or investment in a risk and sometime it may happened disagreement in investment decision.

Fees and Charges

Services provided by unit trust managers are not free in involve fees and charges sometime unit holder must bear with the fees that been charges because professionals unit trust manager provide the professional expertise to investor.

Opportunity Cost

Investor may loss other opportunity in investing other investment because the money had putted to invest in unit trust.

Market Risk

Market uncertainties and changes of market may affect the net asset value (NAV) of unit trust which may fall or rise thus cause the income generated by the fund to change.

Liquidity Risk

It related to the ability to quickly and easy trade at a reasonable price, if is difficult to sell the fund manager may need to sell the fund at a discount to fair it value, which it may affect the capital invested.

Inflation Risk

Return of investment may not able to keep pace with inflation in the short run, it may occasionally experience loss.

Interest Risk

Movement of interest rate affects the fund. It may cause the value of the investment even if the fund does not invest in interest bearing instrument.

4.0 Types of instruments

Unit trust is a good investment instrument for medium to long term investment. Listed below are types of unit trust fund currently available in Malaysia.

1. Income Fund

Invest in fixed income securities and huge dividend-yielding shares with the view to pay out most of the returns. Suitable for investors seeking income and some level of growth at low risks.

2. Capital Growth Fund

Invest primarily in shares with the view to maximize capital growth over the long-term (i.e. through a higher unit price). Appeal to high-risk investors keen on capital accumulation.

3. Aggressive growth funds

Similar to capital growth funds but with investments in aggressive, fast track shares that promise high returns - with higher risk. Generally suitable for high-risk investors.

3. Balanced funds

It have three objectives: income, moderate capital appreciation and capital preservation. Invest across a broad spread of asset categories including shares, fixed income securities and cash. Well-diversified and suitable for investors looking for reasonably safe investments where the risks are lower and which produce average returns.

4. Index funds

Invest in a basket of shares that tracks a selected stock market index.

5. Bond funds

Invest only in fixed income securities such as bonds and short-term money-market instruments. All bond funds are subject to interest rate risk and most to credit or default risk of the issuers.

6. Money market funds

Invest only in short-term money market instruments such as treasury bills, negotiable certificates of deposit and bankers acceptances, with maturity of less than 90 days. Since the funds invest in money market instruments, the returns, while small, are generally more attractive compared to saving deposits. Good for investors looking for liquidity, and perhaps a temporary place to park their funds before they commit to other funds.

7. Islamic funds

Managed according to Syariah principles; invest in shares and fixed income securities which excludes non-halal shares and interest-bearing money market instruments.

8. State funds

Managed by the state development corporations for investors from the respective states.

5.0 Recommendations

Unit trust is getting popular nowadays due to potentially higher return when compare to fixed deposit or EPF saving. Furthermore, EPF is providing an option to withdraw some or your EPF saving for the purpose of investing in unit trust.

If you still wondering whether to invest in unit trust or not, you should see the reason why you should. As mention on the above, Unit Trust being well-diversified financial instruments, they are less risky than if you were to invest in individual stocks. You can gather investment opportunities from all over the world, as they are invested globally and into different financial instruments. They are managed by professional fund managers who aim to obtain higher returns for your money. You do not need to monitor equity markets closely for fluctuations.

Some more, there is a wide selection of unit trusts available to meet the different investment objectives of investors. If you staying invested over time, these returns can compound to very attractive amounts, unlike savings deposits.

6.0 Conclusion

From the discussion on the above, we know much knowledge from this assignment and we know that Unit Trust is an investment that considered a low-risk, low-return investment compare with other investments. There are a number of companies are providing Unit Trust for people to invest, and more and more people to invest nowadays.

Advantages of Unit Trust investment are more than disadvantages even it still have some risks.

In a conclusion, they are two types of people should invest Unit Trust: If you have no time or no interest to invest and to research yourself and other one is f you are high income earner like doctors, famous artists, etc. that you can earn more by spending your time on your tasks instead of investing.

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