Basics of unit trust investments

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IN the previous article, we highlighted the advantages and disadvantages of investing in various investment vehicles, unit trust funds being one of the topics covered.

In this last article of our series, we would like to highlight some key points with regards to investing in unit trust funds to help investors understand what it entails and hopefully, enable them to make more informed investment decisions.

1. What is a unit trust?

A unit trust is a collective investment fund that pools the money of a large group of investors with similar investment objectives. It is managed by professional managers who invest this money in a diversified portfolio of equities, fixed income securities and other investments.

The organisation of a unit trust fund consists of:

•A manager to manage the investment and operations of the fund,

•A trustee to protect the rights and interests of the unit holders and,

•Unit holders who are entitled to a proportionate interest of the assets of the fund.

•The unit holder’s rights and obligations of the manager and trustee are spelt out in the deed of the fund.

2. The benefits of investing in unit trusts

Unit trusts offer investors a simpler, relatively safer and less time-consuming way of investing in securities than investing directly in the stock market. Some of the advantages of investing in unit trusts are:

Professionally Managed – A team of experienced full-time managers, drawing upon their knowledge and experience in the capital markets, will be managing the investments. To perform their investment duties, they have access to various research materials and investment tools that might not be available to individual investor.

Diversification – Portfolio risk can be reduced by diversifying into asset classes which are negatively correlated. However, this is not feasible for individual investors with a relatively small capital. As such, a unit trust fund pools together the resources of a large group of investors and spreads it over a diversified portfolio of investment, thus minimising the risk of ‘putting all your eggs in one basket’.

Liquidity – Unit trust funds are generally more liquid than stocks, as the fund management company is ready to buy back all redemptions made by the Unit Holders, provided such redemptions does not adversely affect the fund.

Affordable – An investor can choose to invest in unit trusts that fit his/her risk profile and financial requirement. As the minimum investment required is relatively low, unit trust funds make professional fund management services affordable and accessible to the general public.

3. The regulatory body

The unit trust industry is governed by the Securities Commission Malaysia (SC), which was established under the Securities Commission Act 1993.

The SC is empowered to require compliance with all legislations and guidelines under its ambit, which are, amongst others, the Capital Markets & Services Act 2007, the Securities Commission Act 1993, and the Securities Commission’s Guidelines on Unit Trust Funds.

These securities laws and guidelines have been established to regulate and to facilitate the orderly development of the unit trust industry and to protect investors’ interest.

This article is brought to you by HwangDBS Investment Management, your Asian Financial Specialists; we believe risks can be managed via portfolio diversification. Log on to www.hdbsim.com.my or call 1-800-88-7080 to find out how.