I am a unit trust agent and investor with Public Mutual since 2005. I have personally made profit from both their cash and EPF scheme investments. Besides that, nearly all my clients have also made profits from their unit trust investment with Public Mutual.
But I am aware that there are many people who have not benefited from unit trust investment probably due to the lack of knowledge and having received wrong or bad advice about unit trust investment. Come to think of it, there are many people who have not even heard of Unit Trust, let alone benefited from it!
So in this long article I will share my knowledge about unit trust investment that could hopefully guide unit trust investors and perhaps serve as a reminder or refresher to other unit trust agents.
What Is Unit Trust?
In Bahasa Melayu, unit trust means ‘unit amanah’. In Malaysia, the term unit trust is more popular and commonly used than ‘unit amanah’.
There are (at the time of writing) 36 private fund management companies in Malaysia. The statistic below shows 10 main unit trust companies based on the managed fund size.
In term of terminology, unit trust is a form of collective investment that allows investors with similar investment objective(s) to pool/gather their savings, which is then managed and invested in stocks or other assets by professional fund manager.
Depending on the type of fund, fund managers could be investing in the following assets:
- Money market instruments
These are productive assets that will generate profit to the owners. Every cent you invest in unit trust represents your investment in these assets. So as a unit trust investor, you indirectly own the assets!
How Does An Investor Make Profit?
If the value of invested asset goes up, then this will translate into an increase in the unit trust price per unit.
Or, the asset could generate cash income such as from dividend or rent, then this income will also translate into an increase in the unit trust price per unit owned by the investor.
The same applies when the opposite happens, meaning that when the asset value goes down and does not make any income, then the unit trust price per unit will also go down.
The going ups and downs of asset value depends on current economic climate, interest rate, currency exchange rate and also the capability of corporate members managing the investors’ asset.
For example, many fund managers choose to invest their unit trust investors’ money in TNB. Every year TNB keeps making profit because the people in Malaysia have no choice but to get their electricity supply from TNB. However, if the CEO and management of TNB are lousy, it is not impossible that TNB could also suffer losses.
Tips 1 : How To Get RM1,000,000 In 15 Years With Unit Trust?
15 years is a time period that is not too long nor short.
If you are now 25 years old, in 15 years you will be 40. Wouldn’t it be great to have RM1,000,000 at 40 years old, while many friends would still be paying the installments of a third car?
If you are now 40, then in 15 years you will be 55. Wouldn’t it be great to have an additional RM1,000,000 upon retirement, aside from the other millions in EPF?
Or you could be a future government retiree secured with the pension benefit for life, wouldn’t it still be great to have RM1,000,000 more cash on top of it?
Let’s learn to calculate using a simple pocket calculator.
This example is based on the assumption of 10% average unit trust return, but it is not a confirmed or guaranteed sum. Let me put it in perspective.
If you are good at monitoring and reviewing the unit trust performance, maybe RM1,000,000 can be achieved earlier, in less than 15 years. If you are lazy and do nothing, maybe it will extend to 18-20 years before you reach RM1,000,000.
But one thing for sure – if you don’t save, you will have nothing but dreams only-lah.
Why Invest In Unit Trust?
Unit trust investors could benefit from many advantages that are not usually applicable for individual investors. Among the benefits are:
The investment mantra, ‘Don’t put all your eggs in one basket’ or ‘diversification’ is often repeated because of its importance in order to minimize investment risk.
Unit trust funds are invested in more than 50 public listed companies, covering various sectors like consumer product, oil and gas, palm oil, health, communication etc. There are also unit trusts that invest abroad.
Therefore, diversification is achieved in unit trust investment across various sectors and geography. For individual investors with limited capital, it is very difficult to achieve this level of diversification.
#2 Low Capital Investment
Unit trust allows someone with a capital as low as RM1000 to join the stock market with low risk, as compared to directly investing in the Malaysian Stock Exchange. Each additional investment is as low as RM100. So it is very affordable and easy for us to keep investing every month if we want to.
With unit trust, everyone can to invest!
We can also start investing in foreign markets like Singapore or the US with the same as low as RM1000 capital. At times when ringgit is plummeting, it is good to have a convenient, affordable and risk-controlled alternative to invest abroad.
If investors are need of cash, there is no need to sell all of their investment. They can just sell whatever amount they need only – as compared to certain type of other investment.
For example, Ahmad and Awang each has a million RM in cash. Ahmad invested in property and Awang in unit trust, with each investment amounting 1 million RM.
After a year, both the property and unit trust investments went up 10%.
If Ahmad wants to withdraw and enjoy the profit of his property investment, he would have to sell the house. Meanwhile, Awang could just withdraw the amount he needs from his available units and the rest would still be invested.
This is what I mean by flexibility in unit trust investment. Similarly if you want to add more investment, surely it is easier to add RM100 in unit trust as compared to buying another property for property investment.
A famous fund manager idol, Peter Lynch said that unit trust is an amazing investment innovation for the common people like us (We who do not have the time, expertise nor big capital to be a full time investor :).
#4 High Liquidity
What is meant by liquidity here?
To put it simply, liquidity is how easy can we get cash from our investment without being charged or having to pay any fee for withdrawing before the investment is matured.
With unit trust, you can withdraw your investment at any time based on the current price without any penalty.
So unit trust has high liquidity, whereas properties has low liquidity because it takes time to find a buyer that will agree to your selling price. If you urgently need cash, you might have to give a lot of discount and even sell the property below the market price.
#5 Professional Management
A unit trust is managed by professionals with experience in the investment world. They have the skills and have done studies in order to take care of our investment.
Unit trust companies are also monitored by the Securities Commission to ensure that the unit trust industry keeps to a high standard.
There are people who suggest that investors invest directly in the stock market. After attending courses and doing some reading, many could not wait to dive into stock market investment.
Studies have found that these small investors are often overconfident with their investment skills and knowledge. They like to do it themselves or D.I.Y (Do It Yourself).
But D.I.Y in investment is not the same as D.I.Y to build a kitchen cabinet.
There are many who originally wanted to make big and quick profit in the stock market but made wrong moves and ended up waiting for a long time to get back their initial investment value.
Sometimes this saying is true, ‘Long term investment is a short term investment failure’.
Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earning (source: Investopedia).
There are two sources of capital in this case. First, the investment capital from our own pocket, that is our initial investment capital. Second, the investment capital from profit of the initial investment itself.
For example, in the first year our capital investment is RM10,000. After a year, this investment made a profit of RM1000, 10% return (or return of investment, ROI). We can choose whether to withdraw and enjoy this profit or leave it to be reinvested. If we reinvest it then it is now an additional capital to generate more profit.
Profit on profit and the money keeps breeding on its own!
Try to work out how much the total accumulated unit trust value will be if the profits keep on being reinvested with the yearly return rate of 10% for 40 years.
How much is the answer?
My calculator gives me RM452,593!
To put this figure in perspective, how many of us have RM452,593 at 40 years old? This is like a miracle because many might not even have RM30,000.
Every investment is subject to certain costs and taxes. For example in stock investment, there are broker fees and stamp duty charges that the investor needs to pay.
The charges in unit trust investment are sales and management charges. Sales charge is between 5-6% and management charge is 1.5% per year. If you invest RM1000, then the sales charge is RM47.62. Meaning that only RM952.38 of the RM1000 will actually be invested.
The cost in stock investment is only 0.6% per transaction, whether you sell or buy. If compared with the cost of buying stock directly in the Malaysian Stock Exchange, then the 5-6% cost in unit trust investment will seem more expensive.
However, it depends on how you minimize the investment cost in the long term. For example with RM10,000 capital, the charges applied to buy stocks are;
1) Total purchase of 1 lot:
RM0.78 x 100 unit = RM78
2) Total purchase possible with RM10,000 capital:
RM10,000 / RM78 = 128.21 lot
However, purchasing odd number of lot as above is not allowed. Brokerage cost, clearing fees, GST and stamp duty also have to be taken into account. So the allowed purchase is for 125 lot only (125,000 unit)
3) Total actual purchase:
RM0.78 x 12,500 unit = RM9,750
4) Total brokerage fee:
Brokerage fee: 0.42%
0.0042 x RM9,750 = RM40.95
5) Clearing fee
0.0003 x RM9,750 = RM2.93
6) GST that has to be paid
0.06 x [RM40.95 + RM2.93] = RM2.63
7) Stamp duty
RM9,750 rounded to RM10,000, so the amount that has to be paid is RM10.
Fee before GST: RM53.88
GST : RM2.63
Thus, amount that needs to be prepared : RM9,806.51
If you buy these stocks and keep it for life, then your investment cost is very low. But many stock investors are usually buying and selling too actively. Sometimes buying in the morning, then selling it directly in the evening to get profit.
The more transactions done, the more cost will be incurred. For example, if you buy and sell 5 times each in a year, the transaction cost is 0.6% x 5 x 2 = 6%.
If this is repeated for years, even the investment capital could be eroded by these charges.
With unit trust investment, you don’t have to buy and sell too frequently. You can utilize the ‘switching facilities’ to get ‘in or out’ of any unit trust without additional charges.
If you invest for 20 years, the 6% sales charge is divided with 20 years, making it only 0.3% per year. So the longer you invest (without repeated buying/selling) the more cost-effective your investment will be.
Let me know if you need more information about unit trust investment in Malaysia,
Elias Abllah, Personal Finance
Whatsapps me 0127176903