Unit Trust

A unit trust is a collection of many different investments combined together and managed by a fund manager. An example of a unit trust is Amanah Saham Malaysia (ASM) which is managed by Amanah Saham Nasional Berhad (ASNB).

There are four (4) main things you’d want to look out for: the unit trust’s reputation, how much risk you think you can handle, how the unit trust has performed in the past, and the unit trust’s expense ratio.

1. Reputation

Don’t just rely on tips from family and friends. Refer to EPF approved unit trusts or check out Morningstar which has its own rating for unit trust funds

2. Your Risk Preference

The word ‘risk’ simply refers to the chance that your investments will lose value. To get a feel of what your risk tolerance might be, ask yourself how much money you can afford to lose or to tie up in an investment for a significant period of time. The more you can afford to lose, and the longer you can tie down your investment, the higher your risk tolerance. Remember, some unit trusts carry higher risk than others.

3. Historical Performance

The past does not necessarily equal the future, but looking at a unit trust’s past performance will give you an idea of how well your money would be managed if it was invested there.

It’s best to look at the fund’s 3 or 5 year performance.

4. Fees

You should always know what the ‘expense ratio’ of a unit trust is because it roughly tells you what fees you’ll be paying to invest in the fund you’ve chosen. For unit trusts, expense ratios can range anywhere from 0.3% to over 3%.

These fees may sound small but they will eat into your returns!

EPF

A good way to check a fund’s credibility is to check out the EPF’s list of approved funds by clicking here and going down to ‘Where You Can Invest’. The funds listed there must fulfil EPF’s minimum score of SACR 2.33. Basically, this score measures how steady a fund’s performance is over time. Funds with scores lower than SACR 2.33 are excluded because they do not perform well steadily.

Speaking of EPF: you may be able to transfer up to 30% of the excess amount of Basic Savings in your EPF Account to invest in those EPF-approved funds!

Morningstar

Aside from this, you can also check out Morningstar’s ratings as well by going to their website here. Morningstar uses its own set of criteria to provide you with clear ratings that show you just how credible a fund is so you don’t have to figure it all out by yourself.

On the website, go to Fund Tools, then to Funds to Explore, and click on the Snapshot tab. Here you’ll see a list of unit trusts as well as their Morning Star rating right next to each name. Click on that Morningstar rating column to sort the list by rating, so that you’ll see all the highest-rated funds right at the top of that list.

Source: Morningstar

With greater risk comes the potential for greater returns, but also the potential for greater losses. The important thing here is to decide how much risk you’re comfortable taking on and then choosing the unit trust fund that matches your risk appetite.

What does higher risk look like? As shown in the graph below, taking on higher risk means that your returns can fluctuate a lot, just like being on a rollercoaster ride.

Carrying lower risk on the other hand means that your returns are less volatile, which also means that you’re unlikely to achieve the same high returns (demonstrated by the yellow line).

Generally:

• Equity funds carry the highest amount of risk because they invest money in the shares of companies, and these can sometimes be volatile (meaning they can go up and down a lot)

• Fixed income funds carry the lowest amount of risk because they invest mainly in bonds (like government or corporate bonds) and money market instruments (investments that generate profit through interest rates)

• Balanced funds are just as the name suggests: they are a combination of equities, fixed income and money market assets, and therefore carry less risk compared to equity funds.

Feeling brainy?

Below are some graphs with real data we’ve taken from an Equity and Fixed income fund. As you can see from the graph, the equity fund goes up and down more than a fixed income fund.

Equity fund:

Source: Morningstar

Fixed Income fund:

Source: Morningstar

To know the risk of a particular unit trust, ask your unit trust consultant for the ‘risk level’ of the fund or ask the consultant for the fund prospectus or fund summary. This document should include a graph of the fund’s price chart and with it, you’ll be able to look at the fund’s pattern of historical returns to see for yourself just how much its returns go up and down.

It’s also important to consider your age when figuring out your risk preference. Older investors should take on less risk because if an investment goes bad, they’ll have fewer years to work and bounce back from any losses they suffer.

To understand how well (or not) a fund is managed, it’s best to look at the fund’s 3 or 5-year performance.

For example, the chart below shows the 6-month Net Asset Value (NAV or basically, the price) of a sample unit trust fund. It shows that overall, the fund has performed well.

Source: Morningstar

However, if we take a look at the 3-year NAV chart, we could say that the fund hasn’t performed well.

Source: Morningstar

How do you find this information? Use Morningstar’s Fund Tools , go to Funds to Explore and click on the Performance tab.

Again, what you’ll see are six columns, but the only one you really need to focus on is the last one: 3 or 5 Year Annualised Return. Clicking on either of these columns will sort it for you in order of performance so that the highest numbers are right at the top of that list.

Here’s a simplified version of the information. You’ll see two pieces of key information: the risk profiles of funds and the returns those funds have made over a 3 and 5-year period.

Source: Morningstar. Data is correct as of 27/05/2019

Fees are unavoidable costs which will eat into your returns

To get a better understanding of how fees can affect your overall returns, let’s study the following case:

Rule of 72:

This rule provides a simple way for us to understand how long it takes for someone to double their investment. Assuming a fixed annual rate of return of x%, it takes approximately 72÷x years to double your investment. Let’s take an example where you have an 8% annual return. In this scenario, it would take you 9 years to double your money.

Now, let’s examine what would happen if you were paying an annual fee of 2%. This would reduce your return from 8% to 6% and as a result, it would take you 12 years to double your investment, instead.

See the graph below: Because of fees, your investment will need 3 extra years to double!

Be very careful and consider all the available options before you incur any fees. Also, avoid switching from one fund to another because doing this will eat into your money even more thanks to Transfer and Switching charges.

Unit trust fees are typically made up of:

• An Upfront Sales Fee

• A Management Fee

• Transfer, Switching, and Redemption Charges

Under ‘Summary’, we talked about the Expense Ratio. The Expense Ratio roughly tells you what fees you’ll be paying to invest in the fund you’ve chosen for yourself. You can look up the total Expense Ratios and other fees easily with Morningstar, just by going to Fund Tools, then Funds to Explore, and click on the Nuts and Bolts tab.

Clicking on any one of the columns will sort them out for you from highest to lowest and vice versa. If you’re not sure which one to look at, you can just use the Total Expense Ratio column.

Please note that brokerage fees and transaction costs are NOT included in the Expense Ratio.

Be sure to ask your agent about the fund’s performance relative to its relevant index. If it hasn’t performed better than the index, the investment manager is actually losing value for you.

• These fees may sound small but they will eat into your returns! You should always know what the ‘expense ratio’ of a unit trust is because it roughly tells you what fees you’ll be paying to invest in the fund you’ve chosen. For unit trusts, expense ratios can range anywhere from 0.3% to over 3%.

• If you are going to invest in unit trusts, you should consider using EPFs i-invest portal where fees are capped. To learn more click here.

Various types of fees:

• Upfront Sales Fee: This is a one-off fee you pay when you purchase the units. Part of this may cover the commission of the salesperson who sold you the product. Sales Fees for an equity or mixed fund can range from 3-6% of the capital invested. Sales fees for bonds and money market funds tend to be lower at about 0-2%.

The Sales Fee is deducted from your funds even before the units you receive are calculated. For example, if you invest RM1000 and the Sales Fee is 5.5% (RM55), then only the remaining RM945 is used to purchase units.

• Management fee: This is a fee to cover the cost of running the fund. An example would be 1.25% to 1.8% per annum of the NAV per unit of equity, mixed or balanced fund and 0.75-1% of a fixed income or money market fund. You’ll be charged this fee every single year. Fees for other types of funds are generally lower.

• Transfer and Switching Charges: This can range from 0.25% to 0.75%. In some cases, there may be a fixed payment of RM25-RM50 instead. Be careful of switching if you’re only investing small amounts of capital because RM50 of RM1000 is 5%, which is a huge bite out of your capital. Also be sure to remember that if you are switching from a bond or money market fund to equity or mixed fund, you may even have to pay the upfront sales fee of up to 5.5% instead!

• Exit/Redemption Fees: Some funds may also charge you a fee to redeem/exit your investment, which means you’ll have to pay to take your money out of the fund and close your account.

You probably won’t know when is a good time or a bad time to buy unit trusts. This is why when you invest, you should invest small amounts regularly.

Thanks to the significant upfront fees, holding a unit trust for just a few years is not really worth it as you may not even recoup your costs! When you choose to invest in a unit trust, you should be prepared to hold it for the long term, say 10 years or more (unless of course, you find that it’s managed poorly!)

Like many other investments, investing in unit trusts always involves the risk of permanent loss of capital. If you decide that you want to sell the units you’ve invested in, the price at that time may be less than the price you paid for them initially. Protect yourself by never putting all of your eggs in one basket!

• Spread out your risk by having only a portion of your wealth in any single unit trust. You can also consider investing in several different unit trusts or in other investments as ways of spreading out your risks.

• Consider ETFs or ‘Exchange-Traded Funds’. In western markets, there is increasing pressure on fund management companies to reduce fees. This has caused an increase in demand for ETFs which have similar benefits as a unit trust but with much lower fees and the ability to make changes without incurring such high costs.

• A unit trust company makes money no matter how well (or badly) your investment performs.

• The unit trust consultant who sells you the fund makes money from a commission at the point of sale (Remember: the upfront fees, which can be as high as 5 to 6%, goes straight to your sales agent as their commission). Always be cautious of the consultant’s advice and remember that their main goal is to get you to buy the product from them.

• A unit trust consultant won’t advise you on other investment options other than unit trusts. Also, for any reason whatsoever, he/she may only promote certain funds to you instead of highlighting others. So keep yourself informed by doing your own homework and staying aware of the other funds that are out there!