Professional Investment Management
A unit trust combines the capital of many investors to employ experienced management in purchasing securities of many companies. The management of a unit trust provides diversification of investments and supervision which few investors could individually afford. Investment management is a full time job which requires specialised knowledge and training.
The most common investing strategy employed by fund management companies is a combination of the ‘top-down’ approach, ‘bottom-up’ approach or a combination of both. The top-down approach takes into consideration factors such as macroeconomic outlook, the current business cycle, interest rate trends and other economic factors. Meanwhile, the bottom-up approach, also known as stock picking, looks closely at the fundamental strengths of a company based on management credibility, financial track record and market share. For fixed income securities, the key factors are credit quality, interest rate risks and managing the bond portfolio’s exposure to changes in interest rates.
Diversification involves the process of spreading risk over a broad portfolio of stocks and bonds in different companies, sectors, countries or regions. This can only be done with substantial amounts of monies to buy a wide variety of stocks.
Unit trusts facilitate the diversification process by providing small investors with an avenue to pool their savings for the purchase of a diversified portfolio of stocks and/or bonds that will bring higher potential returns at lower risks to unitholders compared with investing directly in stock markets.
Unitholders may redeem all or part of their units on any business day and the unit trust management company will be obliged to purchase them. This means unit trusts come with high liquidity whereby they can be readily converted into cash. In fact, the Securities Commission requires that investors must receive their monies within 10 days from the receipt of the repurchase request by the fund management company, and the value of the redemption will be based on the price determined at the close of the business day in which the request for redemption is received.
Advantages of Compounding
Many unit trust funds provide facilities for investors to reinvest their distributions. For those who opted for distribution reinvestment, the fund will automatically credit the distributions into the account, rather than sending distribution warrants. This process of reinvesting the income from the original investment and also of reinvesting the return on the total accumulating investments is called compounding.
To illustrate, let’s say you invested RM100 at the beginning of every month at 25 with an interest growth of 10% per annum. By age 65, your investment would have grown to RM638,000! The key element to compounding is time - the longer the period of time, the greater the growth.
Regularity of Investing
Many people do not have substantial sums of cash available to invest, but they can develop an investment account by investing smaller sums regularly in a unit trust.
Most unit trust funds have plans available to make it possible for smaller investors to invest relatively small amounts monthly. It is easy and inexpensive for an individual to acquire units through deposits of RM100 or more a month in a unit trust fund.
Few people have the experience, time or facility to properly set up an investment programme, much less to supervise it constantly. Unit trust fund managers are professionals who are devoted to solving the investment problems of people from all walks of life.
Unit trusts relieve their investors of the need to handle their own securities transactions. Investors in unit trust funds are not obliged to concern themselves with matters such as:
1. Obtaining quotations on securities being bought and sold
2. Delivery and payment for the securities involved in each transaction
3. Safekeeping of cash and securities
4. Accounting and bookkeeping procedures, etc
Investors of unit trust funds will receive interim and annual reports which describe:
a. The portfolio of the funds
b. Investment changes made in the period
c. Distributions paid, if any