Unit trust is an investment vehicle that allows you to invest in a variety of asset classes, offering diversification benefits. However, to get the most out of them, it’s important to select the best of breed funds, diversify your investments globally and invest through channels with lower management fees.
■ When comparing investment options, look at both the investment management fee and the overall ROI that the investment offers
A COUPLE of weeks ago, I met with a middle-aged couple interested in getting serious about achieving financial freedom.
During our initial consultation, they mentioned that their current investments were in the form of unit trusts recommended by a friend, who is an agent.
However, when I inquired about the specific asset classes their unit trust funds were invested in, they struggled to answer and seemed confused.
This is not an uncommon scenario. Unit trust, one of the most popular investment types in Malaysia, is often misunderstood.
Its easy accessibility and affordability makes it a seemingly a friendlier option for beginners compared to more aggressive investments.
The fact remains, there are still many aspects that are misunderstood about unit trust funds. The ease of access masks the complexities.
So, in this article, we are going to reveal five truths about unit trusts that will help investors make better investment decisions.
Misconception 1: Unit trust is a type of investment
Truth 1: Unit trust is an investment vehicle
A common misconception among new investors is that a unit trust is a standalone investment that focuses on a single asset class, such as property, gold or shares.
In reality, unit trust is an investment vehicle that allows you to invest in a variety of asset classes, offering diversification benefits.
Think of it as a basket containing a mix of investments, like equities, bonds, or even real estate investment trusts. This differs from directly buying individual stocks, where you invest solely in the equity asset class.
For example, if you are looking to invest in Malaysia equities, one option is to directly purchase stocks from several Malaysian companies on the stock market.
Alternatively, you can also invest in a Malaysian equity-type unit trust fund. While the unit trust fund is managed by a fund manager, the asset class you are investing in remains essentially the same or similar.
The specific investment vehicle that you choose is not important. What is more important is the underlying asset classes that you choose to invest into, whether it is using unit trust, exchange-traded funds (ETFS), or other vehicles.
For instance, if you purchase
Malaysian equity unit trusts from three different fund houses, you may think that you are diversifying your investments.
But in reality, these Malaysian equity funds, despite being from different fund houses, still concentrate your exposure to a single market segment.
In essence, you are putting all your eggs into one basket, ultimately investing in a single asset class.
Misconception 2: Equity unit trust funds are as risky as other high-risk investments
Truth 2: Equity unit trust funds are much safer than other high-risk investments
Unit trust funds benefit from a third-party trustee structure, which acts as a safeguard by ensuring the fund’s assets are held on behalf of investors and invested according to the trust deed.
Compared to many other investment schemes, unit trusts are indeed much safer.
Why is that? To illustrate this, let’s take a look at the accompanying diagram.
There are three parties involved in a unit trust fund in Malaysia. The first party is the unit holder, which is you.
Let’s say you invest RM100,000 capital through your fund manager. The money does not actually go into the fund manager’s bank account; it goes into a trustee account, which duty is to hold and protect your capital.
The fund manager is responsible for identifying which equities to allocate the capital to, while the trustee buys and holds the shares according to the fund manager’s instructions.
The beauty of this unit trust model is that it protects your investment.
Even if the fund manager hypothetically goes bankrupt, and has to close its business, your capital is still safe.
This is because the trustee, not the fund management house, holds your money.
Therefore, when you invest in a unit trust fund, you not only getting a return on investment (ROI), but also a return of investment – the return of your capital that you had initially put in.
Misconception 3: Investing in one or two super-performing unit trust funds can grow our serious money effectively
Truth 3: To grow your wealth effectively, you need to diversify globally
The quest for the “best” unit trust fund is a common one, but is it the right approach?
Many investors believe that investing in a single unit trust is effective enough to grow their money in the long run.
The truth is, the way to ensure the growth of your portfolio is by diversifying your asset classes globally.
Take, for example, the impressive performance of the global equities, which have shown an upward trend over the past 30 years.
Several key factors contributed to this phenomenon, including a rising global population and advancements in technology that fuel global demand and productivity.
As many businesses worldwide experience growth and increase their profit, this translates into a rise in global equities.
In contrast, if you were to invest in a share or one fund that focuses on one sector or country, the growth would be unpredictable and less sustainable in the long run.
Therefore, to achieve sustainable growth in your unit trust ROI, ensure that you are diversifying your unit trust funds globally to optimise your growth.
Misconception 4: Unit trust funds are expensive
Truth 4: Unit trust funds can be either expensive or cheap, depending on the channel and market you invest in
One crucial cost to consider for unit trust investors is the sales charge, also known as a front-end fee, applied when purchasing from your chosen fund manager.
When investing in unit trusts through traditional channels, the fees can sometimes go as high as 5%.
It’s important to scrutinise these fees, as high fees can significantly eat into your portfolio’s performance.
For example, suppose your unit trust generates an 8% return in the first year. If the front-end fee charged by your fund house is 5%, your actual return becomes only 3%.
Fortunately, with the online investment platform options and corporate unit trust advisor channel available today, there are many platforms where you can find front-end fees as low as 2% or even lower.
This makes choosing the right channel crucial, as it significantly impacts the fees you pay.
When comparing management fees of your different investments side by side, it is also important to take into account not just the percentage of the fees, but the overall returns of each type of investment and the markets that you invest in.
For example, investors often compare unit trusts to ETFS. ETFS typically boast lower average annual management fees compared to unit trusts.
Due to these lower fees, ETFS might appear to have the potential for higher returns compared to unit trusts.
On the surface, ETF may seem like a better investment option. However, this is not true for all markets.
For example, the investment environment and opportunities in developing markets are vastly different from the developed markets.
In such cases, some unit trust funds managed by experienced professionals have a higher chance of outperforming ETFS despite the higher fund management fees.
Therefore, when comparing investment options, consider the bigger picture.
Look at both the investment management fee and the overall ROI that the investment offers.
Misconception 5: Any unit trust fund salesperson can help you access to the best of breed unit trust funds from the whole market
Truth 5: Only selected qualified advisors can help you access the best of breed unit trust funds from the open market
To optimise your investment portfolio, consider investing in the best of breed unit trust funds tailored to your asset class and target market.
This means that if you are looking to invest in an equity fund in the local market, you should ensure that you pick the best quality fund among all the Malaysian equity funds.
But how do you identify the “best” unit trust fund for your needs? It’s not as straightforward as it seems.
The reality is that many investors rely on bankers or unit trust agents to recommend funds for them to invest in.
However, relying on these recommendations might not be the best approach, as their choices are often limited to the funds offered by their own companies or fund houses.
Therefore, the best recommendation they can make may not be the best fund for you to invest in.
Let’s take the example of several Malaysia equity funds under a single fund house.
The best performing fund within the single fund house, Fund A has achieved an ROI of just under 60% over a five-year period, which is quite impressive.
However, when we broaden our horizons and compare Fund A’s performance to options available in the open market, we are faced with the truth that the fund we initially thought was the best performer (Fund A) ranks lower when compared to other Malaysian equity funds in the open market.
Even more striking, the actual top performer in the open market delivered nearly double the ROI!
In other words, by choosing the seemingly “best” fund within one company only, you could have missed out on potential gains of an additional 60% of ROI. That’s a significant difference!
To ensure that you’re not missing out on potentially better options, consider consulting with independent financial advisors who operate under corporate unit trust advisor company.
They can advise and recommend a wider range of unit trust funds in the open market, not just limited to options within a single fund house.
From the points that I shared above, you’re now equipped with a better understanding of the ins and outs of unit trusts.
Unit trust funds can be a valuable tool to effectively grow your money.
However, to get the most out of them, it’s important to select the best of breed funds, diversify your investments globally and invest through channels with lower management fees.
By following these steps, you can build a sturdy portfolio that will grow steadily in the long run and provide you the financial growth that you seek.
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“Many investors believe that investing in a single unit trust is effective enough to grow their money in the long run. The truth is, the way to ensure the growth of your portfolio is by diversifying your asset classes globally.”
