What Is A Unit Trust Fund?

The Regulatory Framework Of Unit Trust Funds

UNIT TRUST FUND AND ALTERNATIVE INVESTMENT PRODUCTS

THE BENEFITS OF A UNIT TRUST FUND

• Professional Management
  With the benefit of full time professionals, unit trust fund holders are able to leave the investment decision-making to fund managers trained for the purpose. The fund managers have the expertise, resources and market information for conducting in-depth research before investing.

• Minimisation of Risk
  Minimisation of risk is achieved by investing in different types of asset classes, securities or sectors such that losses in one asset class or some securities or sectors will probably be offset by gains in other stocks.

• Diversification Opportunities
  Due to the large pool of funds available, a unit trust fund has more financial muscle than an individual investor and is, therefore, able to diversify more effectively i.e. investments could be spread out more widely amongst a broad spectrum of securities than would have otherwise been available to an individual.

• Affordability
  The minimum amount required for investment is relatively small and generally more affordable compared to stocks.

• Liquidity
  You may liquidate all or part of the units on any Business Day.

• Potential Attractive Returns
  A well-managed, diversified portfolio ensures greater potential of better returns compared to direct participation in the market, at acceptable risk. The returns will be in terms of distribution of income and capital appreciation.

• Convenience
  The fund manager conducts all the necessary investment research that the individual investor may not have the time or resources to carry out. As a unit trust fund investor, you will be kept up-to-date with regular performance reports and market updates. You would also be relieved of the administrative paperwork involved in managing an investment portfolio.

• Variety Of Funds To Match Your Needs
  Different unit trust funds have different objectives. You may choose any fund that commensurates with your individual risk profile, financial goals, affordability level and investment time frame.

• Tax Benefit
  Unit trust funds may receive non-taxable gains and exempted income and broadly comprise the following:
  • Interest/Profit (in the case of Islamic instruments) received from bonds/securities issued by Government, bonds issued by public listed companies, or companies rated by Rating Agency Malaysia Berhad or Malaysian Rating Corporation Berhad, Malaysia Savings Bonds issued by Bank Negara Malaysia
  • Interest/Profit (in the case of Islamic instruments) paid by any licensed bank or financial institution
  • Capital gains from realisation of investment
  • The non-taxable gains and exempted income normally will be distributed to investors exempted from tax

The Potential Risks Of A Unit Trust Fund

• General Investment Risk
  Fund Manager Risk. The performance of a unit trust fund depends on the experience, knowledge and expertise of the fund manager and the investment techniques adopted. The risk remains that the securities which the fund manager have selected will not perform as expected. This could cause the fund’s returns to lag behind similar funds’ returns.
  Results Not Guaranteed. As a result of risk elements described herein, the returns from unit trust funds are not guaranteed. Investment return and principal value will vary so that, when sold, an investment may be worth more or less than when purchased.
  Financing Risk. Investors must be aware of the inherent risk involved with loan financing of a unit trust fund, which should include the ability to pay the loan installments, which may be affected by unforeseen circumstances such as an increase in interest rate and the ability to provide additional collateral should the value of investment fall below a certain level.

• Interest Rate Risk
  This risk relates to unforeseen movements in the direction of interest rates. Generally, interest rates and fixed income security value are inversely related; as interest rates rise, the resale value of fixed income security falls, and vice versa. Generally, bonds are more vulnerable to this risk than other types of investments. Rise in interest rates could cause the bond market and individual securities in the fund’s portfolio to decline in value. Unit trust funds holding such securities could then experience a decline in their net asset value. Interest rate risk is a general economic indicator that will have an impact on the management of the unit trust funds regardless of whether it is a Syariah based unit trust fund or otherwise. This does not in any way suggest that Syariah based unit trust funds will invest in fixed income securities, which are not approved by the Securities Commission’s Syariah Advisory Council and the appointed Syariah adviser for the fund. All investments carried out for Syariah unit trust funds will be in accordance with Syariah requirements.

• Credit/Default Risk
  Credit risk arises when there is a possibility the issuer is unable to pay interest/profit due and/or the principal amount on time. The value of the fixed income security will decline if there is a default by the issuer or there is a deterioration in the credit quality of the issuer. This could then affect the investment performance and net asset value per unit of the unit trust fund.

• Islamic Profit Sharing Risk
  This is the risk that the value of investments will fluctuate due to changes in the market profit sharing rates. The risk is mainly applicable to Shariah-approved coupon-paying fixed income and Islamic money-market instruments. This risk does not arise in equity investments. Exposure to this risk is mitigated by careful asset allocation process where exposures can be reduced upon anticipation of adverse profit sharing rate movement.

• Liquidity Risk
  Liquidity risk is defined as the ease with which a security can be sold at or near its fair value depending on the volume traded on the market. The unit trust fund may have no choice but to sell that security below its fair value due to low trading volume which in turn could cause the fund’s portfolio to decline in value.

• Market Risk
  This is a class of risk that inherently exists in an economy and cannot be avoided by any business or company. It is usually due to changes in the economic outlook and affects broad market confidence. Market risk cannot be removed from an investment portfolio by diversification. Investors should, therefore, note that the performance of a unit trust fund might go up or down in accordance with the prevailing market risk.

• Specific Risk
  This class of risk represents the risk unique to a particular company due to company-specific factors such as capital structure, quality of management, nature of business, etc. These factors could cause the appreciation or depreciation of the securities issued by that company. The net asset values of unit trust funds with significant exposure to that company could be expected to fluctuate. This risk may be greatly reduced through diversification.

• Inflation/Purchasing Power Risk
  Inflation reduces the purchasing power of money i.e. it is the risk that your investment return fails to keep pace with the inflation rate. Therefore, to maintain an investment’s purchasing power, its total return must keep pace with inflation rate. In an inflationary environment, fixed rate securities are exposed to higher inflation risk than inflation-linked securities.

• Currency Risk
  The risk that a business’ operations or an investment’s value will be affected by changes in exchange rates. For example, if money must be converted into a different currency to make a certain investment, changes in the value of the currency relative to the Malaysian Ringgit will affect the total loss or gain on the investment when the money is converted back.

• Country Risk
  It relates to the likelihood that changes in the business environment will occur that reduce the profitability of doing business in a country. These changes can adversely affect operating profit as well as the value of the assets.

• Risk Of Non-Compliance
  The unit trust fund’s objectives may be affected should the management company and the fund managers not adhere to the fund’s investment mandate. To maintain the fund’s integrity, sufficient internal policies, controls and monitoring must be in place to protect the interests of unitholders.