Switch to preserve profit or cut loss!

One of the least known and therefore least used feature available to an investor is the switch facility. Most unit trust companies entitles you to two free switches out of a Balance or Equity Fund every calendar year. The fund manager will charge a fee for every subsequent switch out of the same Fund within a given calendar year after the two free switches.

What is the switch facility?

The Switch facility is a service offered by the Fund Managers to all unitholders and enables the investor to rebalance their portfolio by converting units of one Fund at its NAV (net asset value) to units of another fund (also at NAV) managed by the Manager. In other words, you get to move your NAV from one fund to another fund. There is no charge imposed when a switch is done thus the total NAV remains the same even after the switch. You may ask, “What is the point of switching when the total net asset value before and after the switch is the same?”

Exactly.

Why would there be a switch feature if there is no difference? Why does the company have this switch facility if there is NO Difference? Is there something that you do not now know which you should know?

Let us explain.

There are 3 primary categories of funds namely Bond, Balanced and Growth. These funds have differences ranging from the asset types and the proportion of each asset class that they are investing in.

Bond funds also known as Income Funds invest primarily in bonds issued by the Malaysian Government or highly rated public companies like Tenaga, Celcom, etc. Bonds have fixed coupon rates and are largely unaffected by the ups and downs of the equity market.


Growth funds invest primarily in equities and may invest up 90% - 95% in equity stocks listed in the KLSE. The objective of growth funds is to achieve capital appreciation from its investments. In view of this high exposure, its’ value will go up and down depending on whether the market is bullish or bearish. These funds can be very volatile and sensitive to the ups and downs of the stock market. (Bursa Saham KL).


Balanced funds also invest in equities. The difference is that balance funds invests a little less in equities compared to Growth funds. Generally they invest only up to about 60% in equities. In view of this, the volatility of the fund will also be affected by the ups and down albeit a little lesser in degree.

This clearly demonstrates that in anticipation of a bearish market, a unit trust investor would be wise to switch from a balanced or growth fund to a bond or income fund in order to preserve its total asset value instead of seeing the investments diminish in value. When a bullish market is anticipated, the investor would be wise to switch his bond or income funds back into growth or balanced funds.

Granted that the perfect timing for such a switch is hard to predict and we may do a switch too early, a switch is nonetheless a wise move. The strategy of switching is also otherwise known as asset rebalancing.

This is why an investor should develop an interest to be updated on the stock market trends through reading financial magazines, business pages, fund managers market reviews and reports.




An investor can actually preserve his/her profits by making the appropriate switches at the appropriate times. Switching is like a redemption but instead of taking out your investment from the fund manager, you are moving your investment from one fund to another. Then when the opportunity arises, you switch it around again at no cost. If you make a redemption, you have to pay the service charge of between 5-7% all over again.

Switching is free and we can use it to preserve profit or cut losses!

We wish you successful investing.