How to make unit trusts work for you

MANAGING finances is a very personal thing, and financial consultants and planners will tell you that different people have different risk profiles and criteria where managing their finances and investment is concerned.

Investors today have a number of financial products to choose from to fit their risk profile and criteria for returns and one of the more straight-forward ones is the unit trust fund.

A unit trust fund is an investment trust formed to invest in a portfolio of securities in which retail investors can participate by buying units of a fund. The trust fund is managed by professional fund managers.

However, investors may be put off by unit trusts due to the current turmoil in the equity and financial markets. Furthermore, unit trusts require long-term investment and patience, which at this point is a hard-sell because of the volatility of the markets.

In fact, according to the Federation of Malaysian Unit Trust Managers’ (FMUTM) website, the industry has seen its net asset value (NAV) drop by 20% over the year to RM135bil as at Oct 31, 2008.

However, the FMUTM says concurrent with the drop in the NAV, the industry NAV compared to Bursa Malaysia’s total market capitalisation increased to 20%.

This may be due to the KLCI having dropped 39.84% year-to-date because of the impact of the economic slump and the financial crisis that took a turn for the worst in mid-September when Lehman Brothers Holdings Inc collapsed and American International Group Inc needed a bailout.


A worker is seen carrying a box out of the US investment bank Lehman Brothers offices in the Canary Wharf district of London after it collapsed. – Reuters

Several financial planners StarBizWeek spoke to recently counselled that dollar-cost averaging or investing a fixed sum over a long period is the trick to reducing exposure to risk rather than making a single large investment.

The idea behind this is that the fixed sum can be spent on investing in a portfolio regardless of the price because the investment will eventually balance out in terms of cost.

These experts have heard stories of how investors have put all their money in one basket, thereby violating the most basic of investment rules, which is to diversify into different asset classes and also to diversify within a particular asset class.

In this respect, unit trust funds are generally divided into three types – fixed income, balanced/diversified and equity unit trusts.

“It all falls back on why you want to invest,” CTLA Financial Planners Sdn Bhd managing director Mike Lee said. “If you feel that the 5% dividend on average that you’re getting from the Employees Provident Fund (EPF) is not enough, than you may want to take a bit of a risk by taking money out from the EPF and invest long-term in unit trusts,” he says.

Lee says the issue is what type of unit trust to invest in. “At this point, due to the volatility of the equity markets, it is better to put more money in fixed income or balanced trust funds. I would advise to put at least 80% into fixed income,” he adds.

Lee says another way to secure a fairly stable income but that involves more risk is to invest in a mix of unit trusts where fixed income make up half the basket, balanced unit trust funds made up 30% and equity unit trusts made up another 20%. “This way you’ll be able to get a gross return of 7% to 8%, which is fair considering the fact that the KLCI is down by nearly 40%,” he says.

Lee says investing in the mix will allow for some risks and conservatism without speculating or trying to time the market. “At the same time you don’t want to miss the boat,” he says.

Gary Low, a senior financial consultant with Great Eastern Life Assurance (M) Bhd, says Malaysians in general prefer to invest in short-term, high-risk products that give higher returns than conventional savings such as fixed deposits or EPF dividends.

“You need to have invested at least five years before you can see any meaningful returns,” he says, adding that in more financially-matured markets, people invest for at least three years.

Low says a lot of people here are aggressive in their investments even though they say they are conservative. “These investors, if they had put their money into equity funds, would have lost it since the KLCI is down up to 40%,” he says.

“It’ll take them the next five years just to break even assuming an average 8% return on investment,” Low points out. His advice is to put 80% into fixed income and the rest into balanced trust funds. “Lets wait and see what next year would be like,” he says.