A Personal Finance Blog for Malaysian: Pros and Cons of Unit Trust Investment

Thursday, August 12, 2010

Pros and Cons of Unit Trust Investment

Advantages of Unit Trust Funds:

Affordability
This is an obvious advantage - it does not cost much to invest in a unit trust fund. For an initial investment as low as RM1,000, and you can buy into a fund and get started. Some unit trust funds allow you to add monthly basis as low as RM 100 after the initial investment.

Diversification
As an investor in a unit trust fund you can access a wider range of securities than you could by investing on your own. With the amount of money you invested you can only purchase limited shares of a very few companies; but when pooled in a unit trust you achieved an immediate diversification - your money is pooled with other investors a like and get spread out over many companies: this provides you with greater purchasing power.

More important diversification reduces risk. Loses in some (invested) companies can be offset by gains made in other companies. You can further reduce your risk by investing in several trust funds across different sectors.

Liquidity
It is easier to buy and sell your units compared to investing directly in company stocks where price and opportunities depended on actual demand and supply of your share at any given time. With unit trust fund you can buy and sell at the published price of the fund.

Professional Management
Unit trusts are managed by a team of experienced professionals who manage the fund in an informed and organised manner as opposed to the individual investor who may invest in a random fashion. Investment decisions made by fund managers are based on extensive research and their own investment skills, and they continuously monitor the portfolio based on researched information.

Reduced Stress
The investor does not have to worry about personally monitoring his various investments - keeping an eye on their performance and deciding when to buy or sell. Instead he has the superior investment skill of professionals to do it for him. Unit holders receive interim reports every six months on the progress of their funds, the investment changes made and dividends paid, as well as the fund manager's opinion on the investment market and economy.

Access to broader array of financial assets
Unit trust fund managers can trade in investment products that are normally inaccessible to the individual investor, such as government and corporate bonds, which may be restricted to institutional investors. Some of these products are traded in large amounts, which limits the individual investor even when he has the opportunity.

Disadvantages of Unit Trust Funds:

Subject to market risks
Since unit trusts invest in marketable securities, they are of course, exposed to market movements. Diversification will help reduce the risk but it will not eliminate risk entirely. The prices of units go up and down, dividends may or may not be paid, and you may realise a gain or loss when you sell your units.

Not suitable for short-term investment
Unit trusts are an investment vehicle suited for the medium to long term. This is because the gains from the investment in unit trusts are not realised immediately. At best one could sell the units held once its price appreciates. However, the upward movement in price, being dependent on the movement of the market, is usually much slower than the market's movement.

The moderating effect of diversification also works both ways i.e. to spread the risks in the case of a market downturn as well as the rewards in the case of an upswing in the market. Dividends for unit trusts are declared on a periodic basis and the compounding effects would only be realised over time in a favourable market environment.

No custom-made service
Unit trust funds are not custom made for you specifically; however there are various funds available in the market for you portion your investments and savings to come as close as possible to match your financial plan.

For more info on types of unit trust fund please read Types of Unit Trsut Fund

And to understand better the type of investor you are please read What type of investor are you?

A Word about Costs Associated with Unit Trusts:
There are some costs to the investor of unit trusts. It is important that you understand the various fees that will be charged to you by the fund as they will affect your total returns.

The unit trust companies are allowed to charge three types of fees:

1. Initial service charge - this is usually built into the fund's unit selling price also known as front-end load;
2. Repurchase fee - this may be included in the fund's unit buying price; and
3. Management fee - this represents the company's fee for administering the fund and is directly charged to the fund.
In addition, there are also other expenses such as the trustee fee and brokerage expenses borne by the fund.

You as an investor should examine the fees structure of the various funds you are considering. Ultimately what is most important is the fund manager's competence. It is pointless to choose a cheap fund if it is managed by a mediocre fund manager, but a great fund manager may warrant higher fees.