Complete Guide to Unit Trust Investments In Malaysia

As of January 2024, Malaysia's domestic fund management industry reported RM997 billion in assets under management. This statistic not only emphasizes the significant role of unit trusts in the nation's investment landscape but also showcases the diverse opportunities within Malaysia's robust financial market. 

Governed by the Securities Commission Malaysia, the unit trust framework prioritizes investor interests, guided by expert fund managers and trustees. This guide aims to delve into the essentials of unit trust investments, highlighting their strategic importance for both new and experienced investors in leveraging Malaysia's dynamic fund management sector.

What Exactly is Unit Trust

Unit Trusts in Malaysia are designed as a collective investment scheme where investors with similar financial objectives pool their resources. This pooled money is then managed by professional fund managers who invest in a diversified portfolio encompassing various asset classes such as cash, deposits, bonds, shares, properties, and commodities. 

Investors in unit trusts do not directly own the assets in the portfolio; instead, they hold units representing their share of the fund. The value of these units varies with the fund's performance, offering potential returns through income distribution and capital appreciation. 

Unit trusts appeal to individuals seeking exposure to a broad range of investments without the complexity of managing a portfolio, aiming for higher returns over the medium to long term compared to traditional savings or fixed deposits, albeit with some level of investment risk.

Why Invest in Unit Trust

For an individual to effectively manage their own investment portfolio, staying abreast of market trends and sentiments is crucial. In today’s complex financial markets, this requires digesting a vast array of information from countless sources. For many investors, keeping up with this flood of data is daunting, if not outright impossible, leading to significant frustration as they struggle to stay informed.

Investing in unit trusts offers a solution by shifting the bulk of this investment expertise and responsibility to those best suited for it: professional fund managers. Beyond this pivotal advantage, unit trusts present several other key benefits worth considering:

• Professional Management: Expert fund managers take on the task of making informed investment decisions, using their skills and experience to potentially enhance returns.
• Affordability: Starting with a modest investment is possible with unit trusts, making it accessible to a wide range of investors.
• Diversification: Unit trusts spread investments across various assets, reducing the risk associated with concentrating funds in a few selections.
• Liquidity: These funds offer the ease of buying and selling, providing investors with the flexibility to access their funds when needed.
• Wide Investment Exposure: They enable investment across diverse asset classes, often unattainable individually with limited capital.
• Cost Efficiency: Unit trusts usually incur lower transaction fees and charges due to economies of scale, benefiting the investor.
• Regulatory Protection: In Malaysia, unit trusts are regulated, offering an added layer of security and confidence for investors, ensuring their interests are protected.

In essence, unit trusts simplify the investment process, making it more accessible, diversified, and managed by seasoned professionals, all within a regulated framework that safeguards investor interests..

Types of Unit Trust

In Malaysia, the unit trust landscape is diverse, offering various types of funds to meet the different risk appetites and investment goals of investors. Here’s a closer look at the types of unit trusts available:

1. Equity Funds

Equity funds invest primarily in stocks of listed companies, making them a popular choice for those looking to gain exposure to the Malaysian stock market. The value of these funds tends to move with the market, offering higher potential returns at a higher risk. Within equity funds, there are:

• Aggressive Growth Funds: Target companies with high growth potential, albeit with greater risk.
• Index Funds: Aim to mirror the performance of a specific index, offering a diversified investment approach.
• International Equity Funds: Focus on investments in foreign markets, broadening the geographical exposure.

2. Fixed Income Funds

These funds invest in government securities, corporate bonds, and other fixed-income instruments. The aim is usually to provide steady income with less emphasis on capital growth, though there's potential for both gains and losses due to interest rate fluctuations.

3. Money Market Funds

Similar to a bank account, these funds invest in short-term, low-risk instruments, offering stability and quick liquidity, with a fixed unit price.

4. Real Estate Investment Trusts (REITs)

REITs allow investors to put money into commercial real estate, making property investment accessible to smaller investors. This investment type provides exposure to the property market and portfolio diversification.

5. Exchange Traded Funds (ETFs)

ETFs are designed to follow the performance of a specific market index, combining the flexibility of stock trading with the diversification of index funds. They're known for their low expense ratios.

6. Balanced Funds

For those seeking exposure across multiple asset classes, balanced funds invest in a mix of equities, fixed income, and sometimes cash, aiming to reduce the risk associated with single-asset investments.

7. Syariah Funds

Catering to investors seeking compliance with Islamic principles, Syariah funds exclude investments in companies involved in non-Shariah compliant activities such as conventional banking, gambling, and non-halal products.

How to Choose the Best Unit Trust

Choosing the best unit trust involves a careful consideration of several factors, beyond just past performance. Here’s a guide to help you navigate the process:

1. Importance of Performance

While performance data is crucial for evaluating a fund's success over time, it's not the sole factor to consider. Unit trusts don't guarantee returns; their value fluctuates with market conditions, which affects the rate of return. It's beneficial to assess performance across various time frames to get a comprehensive view.

2. Historical Results

Remember, past performance doesn’t predict future outcomes. Still, understanding a fund's historical performance can provide insights into the fund manager's ability to navigate market cycles. Ensure the fund’s objectives and the manager’s strategy align with your investment goals.

3. Long-term Performance

Focusing on long-term performance is advisable since financial markets and economies undergo cycles. Avoid the temptation to chase the latest high-performing funds, as their sectors may not perform as well in the future.

4. Comparing Funds

Ensure accurate comparisons by evaluating funds with similar objectives and policies. Remember, the investment value can rise or fall, and currency exchange rate changes can also affect your returns, especially in offshore funds.

5. Measuring Fund Performance

Evaluate a fund's total return, which accounts for changes in unit price and assumes reinvestment of distributions. Total return can be presented as cumulative over time or as an average annual total return. Comparing a fund’s total return against similar funds or a relevant market index provides a clearer performance picture.

6. Information Ratio

This metric measures a fund's performance relative to its risk, considering excess returns over a benchmark and the volatility of those returns. A higher information ratio indicates a fund has performed well given its risk level, offering a valuable perspective on the fund manager’s effectiveness.

7. Unit Trusts Fund Performance Rankings

Rankings and ratings help compare past performances but aren’t predictive of future success. Be informed by reading prospectuses and understanding a fund's objectives, risks, and management strategies.

8. Understanding Unit Trust Risks

Investing in unit trusts involves several types of risk, including:

• Market Risk: The possibility of losing investment value due to economic conditions or political events.
• Liquidity Risk: The risk associated with the difficulty of selling an investment without a significant price change.
• Management Risk: The potential for fund losses due to poor management decisions.
• Inflation Risk: The danger that returns won’t outpace inflation, leading to a loss of purchasing power.
• Interest Risk: For fixed income securities, the risk that interest rate changes will affect the investment’s value.

What are Some of the Best Unit Trusts in Malaysia

Identifying the best unit trust funds often involves scrutinizing past performance across various time frames—1, 2, 3, 5, and 10 years—to gauge consistency and potential for future returns. According to Fundsupermart, here are some of the best funds to look at (updated as of 16th April 2024)

Top 5 Performing Funds (1 Year)

Top 5 Performing Funds (2 Years)

Top 5 Performing Funds (3 Years)

Top 5 Performing Funds (5 Years)

Top 5 Performing Funds (10 Years)

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How do dividends work in Unit Trust

Unit trust funds do distribute dividends to investors, which represent a share of the earnings generated by the fund's investments. Here's an overview of how dividends work in unit trust funds and their implications:

How Dividends Are Calculated

The amount you receive in dividends from a unit trust depends on two main factors:

• The number of units you hold in the fund.
• The dividend per unit announced by the fund.

Dividends are distributed from the fund's earnings and are paid to investors typically in cash. It's important to understand that dividends are not the same as the returns on your investment; they are a portion of the profits made by the fund from its underlying investments.

Impact of Dividends on Net Asset Value (NAV)

When a unit trust distributes dividends, the Net Asset Value (NAV) per unit of the fund decreases by the amount of the dividend per unit. This is because the distribution of dividends reduces the total value of the fund's assets divided by the number of units outstanding.

Example:

• Suppose you own 1,000 units in a unit trust, with an NAV of RM1 per unit. Your investment's total value is RM1,000 (1,000 units x RM1 per unit).
• If the fund declares a dividend of RM0.05 per unit, you receive RM50 in dividends (1,000 units x RM0.05).
• After the dividend payout, the NAV per unit adjusts to RM0.95, decreasing the value of your investment to RM950 (1,000 units x RM0.95 per unit).
• However, when adding the dividend received to the new value of your investment (RM50 + RM950), the total remains RM1,000, equal to the investment value before the dividend distribution.

Purposes of Dividends

Dividends serve several purposes for investors:

• Liquidity: They provide a way to receive cash from your investment without needing to sell any units, avoiding redemption fees.
• Reinvestment: You can use dividends to purchase more units in the fund, potentially increasing your capital gains if the NAV of the units increases in the future

Fees Associated with Unit Trust Investing

When investing in unit trusts, it's crucial to understand the various fees and charges you may encounter, as these can impact the overall return on your investment. Here's a breakdown of common fees associated with unit trust investments:

Initial Service Charge

This is the fee charged at the time of investment into a unit trust, often referred to as the entry or sales charge. It's designed to cover the costs related to marketing and distributing the unit trust, as well as the ongoing service and advice provided by the unit trust consultant. 

Exit Fee

Also known as the repurchase or redemption charge, this is a fee that may be deducted from the total amount when you sell or withdraw from your investment in a unit trust. The exit fee compensates the fund for the costs associated with your withdrawal and is typically a percentage of the amount being withdrawn. This fee tends to decrease the longer you hold your investment and may not apply after a certain period.

Annual Management Fee

This fee is charged for the professional management of the fund's investments. It covers the costs of portfolio management, including the manager's fees, as well as trustee and custodian expenses, audit fees, and other administrative expenses such as printing and distributing annual reports, mailing distribution checks, and other necessary administrative tasks. The annual management fee is deducted from the fund's assets and is reflected in the fund's net asset value (NAV). This fee is expressed as a percentage of the fund's assets under management and is charged annually.