Monday, 22 April 2013

4 Myths About Unit Trust Investing

I find that the public in general have been mislead into believing certain myths about unit trust investing. These myth are largely cause by lack of knowledge about unit trust, false information created by non believers of unit trust and also inaccurate information being disseminated by unscrupulous unit trust agents that are too eager to make a sale. In this post, I would like to share the 4 Myths of Unit Trust Investing to everyone and hopefully clarify some existing misconception that have existed for such a long time.

1) Actual Annual Returns of a Fund must deduct the Annual Management Fee!
This is one of the biggest misconception many Malaysians have towards unit trust. When we see the annual returns shown in a fund factsheet, many investors tend to deduct the annual management fee from the returns to get the actual returns. For example:

Fund A
Annual Management Fee : 1.8%
Returns for 2012 : 7%
Actual Returns : (7% - 1.8%) = 5.2% <- mistake

The sample above is a misconception many of us tend to have towards unit trust. When we look at the annual returns stated in a fund fact sheet, that value is in fact the true Actual Returns of the fund for that year

Why is it so?
Firstly the annual management fee will be deducted from the fund's Net Asset Value on a day to day basis. Therefore when a fund publishes their fund price at the end of each business day, this is the true value of the fund after deducting all cost incurred for the day including the annual management fee.

Next, when calculating a fund's Annual Return for a particular year (say 2012), the fund price on 31st December 2012 is subtracted from the fund price on 31st December 2011. After which the difference is the percentage increase or decrease of the fund value as compared to the fund price on 31st December 2011. 

Looking at what I have explained above, we know that the annual management fee has already been deducted from the fund price on a day to day basis. Hence when calculating a fund's Annual Return, we need not deduct the annual management fee again.

2) There is only one Fund House available, which is Public Mutual
Another misconception many Malaysians have towards the unit trust industry. The truth is Public Mutual (PM) is the largest fund house in Malaysia. That is a fact. But bear in mind that it is not the only one available for investors. Due to aggressive advertising and promotion by PM, many Malaysian are only exposed to PM. The problem is so deeply rooted that whenever we talk about Unit Trust, we refer to Public Mutual. 

Truth be told that there are many other credible fund houses apart from PM such as Hwang Investment Management Berhad, Eastspring Investment Berhad, CIMB Principal Asset Management, Kenanga Investors Berhad and many more that offer unit trust funds for Malaysians. 

If you're diligent enough to do your homework or just search my blog, you'll realize that other funds apart from PM are performing much better then what PM's funds have to offer. That is a fact!

3) If A Fund House Goes Bankrupt, We Will Lose Our Investment
A structure of unit trust investment consist of the investor, a fund management company (fund house) and a trustee. The investors, that's us, place our money into a Unit Trust Scheme which is safeguarded by the trustee. A fund house manages the funds available from the Unit Trust Scheme and in return charges investors an annual management fee. 

In the event that a fund house or company goes into bankruptcy, the money that investors have placed into the Unit Trust Scheme cannot not be legally used to pay off creditors of the fund house that declares bankruptcy 

4) There Is Only One Type of Unit Trust
Generally, Malaysians have the perception that unit trust invest into shares in Malaysia. While part of this perception is true, there are still much more to unit trust then only investing in Malaysia share market. 

In total there are more then 600 over unit trust funds available in Malaysia. Generally, unit trust consultant recommend funds that invest in Malaysia because the fund managers are local and are generally exposed to the Malaysia market. However there are fund houses that have experience investing overseas, hence allowing them to launch funds that are primarily targeted at investing in specific geographical location such as:
  1. Asia Pacific excluding Japan
  2. Australia
  3. China
  4. Hong Kong
  5. Indonesia
  6. Japan

Apart from funds that invest in a variety of geographical location, there also funds that have are specifically designed based on investors risk profile. By setting guideline percentages of their asset allocation, investors with low risk tolerance select funds that have lower percentage exposure to the volatile share market. Here's a simple guideline:
  • High Risk Tolerance - Select a fund that allocates 90% of more of its asset into Equity/Share Market
  • Medium Risk Tolerance - Select a fund that allocates 50% to equity and 50% to fixed income investment such as bonds or sukuk
  • Low Risk Tolerance - Select a pure fixed income fund 

As you can see, with a variety of funds available for the picking, learn to question to your unit trust consultant on the availability of these funds. Find out what's there to offer and not just blindly follow the consultant's recommendation. 

If you are based in PJ or KL and would like to know more about unit trust feel free to drop me an email at

Cheers and Happy Investing

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