Friday, November 18, 2011

Basics About Unit Trust

Although unit trust is quite common in Malaysia, not everyone got the concept right. Many unit trust agent in the market had not been passing down the basic knowledge of unit trust to make the investors understand fully.

Recently I met up with a senior manager of a public list firm. She had been in finance for sometime but when we discussed about the concept of unit trust - the question that she ask tells me that she is not very familiar with it.

Let's go back to the basic.
So what is unit trust?

It is no more than a group of investors with the same objectives gather their month and hire a team of professionals investment managers to help them monitor their investment and try to achieve the investor's objectives.

Why do they want to do so is because the investors capital is too small for them to start a portfolio (maybe not even for 100 shares) and that is why by gathering the capitals from different investors - it achieve a goals of allowing them to setup their 'own' investment portfolio.

What's an investment portfolio? Basically a pool of investment assets with a combination of equity (stock market), bonds, commodity and other investment asset.

If an investor is investing alone, it is impossible for a small time investor to be able to have a portfolio of himself due to limited capital. Maybe you can only buy some shares of a single company and all your risk and rewards lies on this single company. To those who are really good in analysis and have good knowledge of investing - it should be a good way because you're gathering your capital to one single share that can bring you a lot of rewards.. Sound's good but not every investors can achieve that.

With a portfolio you can basically keep your risk diversified. Meaning if you invest everything in BP as an oil company earlier the year. The oil spill news will bring your capital down in term of market value and you'll be stuck with that one shares hoping that it can turn back into profits - which is difficult.

So why call units?Unit Trust came from a name of unit because the money that you've place into the pool of investment portfolio will be divided into unit and the value of the total pool will be calculate in term of unit price. When the investment brings in return and the shares invested increase in value - the market value for the pool of investment will increase meaning your unit price will also increase.

The price will be calculated on the end of each day after deducting all the cost involved in the unit trust fund.
The cost will involved the administrative cost, trading cost (brokerage fee, etc), audit fee, security commission fee, etc. So if the stocks or bonds is not increasing in value and when the investment management deduct all the fees, the unit price will be affected.

But since the cost are fixed and is shared by all the unitholders. You'll not see a dramatic difference even after they deduct the expenses.

The return of unit trust is normally by regular income (if the investment management distribute the income as distribution) or when capital appreciation. Either way are actually the same because when income are distributed, you will basically see the price of the unit drops a little but you as an investor will already received it as hard cash income. So depending on your preference you might like unit trust that distribute income from time to time.

I shall share more about unit trust in the coming post to bring more information to you.
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