Unit trusts are a popular investment vehicle in Malaysia. Thirty-nine locally incorporated management companies were approved by the Securities Commission Malaysia, offering 734 unit trust funds with a total net asset value of RM551.36 billion. Similar to mutual funds, unit trusts pools of finances from different investors to invest in a basket of stocks and bonds. The difference is unit trusts trust funds with a set number of shares and end dates. Whereas mutual funds are actively managed and held by the fundhouses without the participation of a trust company. Since unit trusts are managed by a fund company, it is a good investment option for beginners and seasoned investors alike.
With 734 funds available on the market, it can be a tricky and overwhelming endeavour to explore. With so many options to choose from, how can you make an informed decision? Here are six strategies to help you in your unit trust endeavour in Malaysia.
1. Know Your Investment Objectives
Do you want to buy a house in the next five years? Or perhaps you want to get a head start in retirement planning? Like a good marathon runner, an intelligent moneymaker focuses on their end goal. Otherwise, you’d be easily swayed to invest in a unit trust that is not managed by a trusted fund company or is too volatile.
Decide on what your investment will be used for. Then, you can understand your risk profile better since you have the big picture of when your investment will be liquified. If you plan to keep your investment for less than five years, it’s considered a short-term commitment with a higher risk of capital loss. In the end, you’ll have a clearer mind and be able to choose the right unit trust with the right risk level and performance to meet your financial goals.
Understanding your investment objectives is crucial for making informed decisions. Consider factors such as the time horizon for your investment and your financial goals. If your aim is to buy a house in the next five years, your investment strategy may differ from someone planning for retirement.
Moreover, it’s not just about having an objective but understanding the implications for your investment choices. For instance, if your goal is short-term, within the next five years, it classifies as a short-term commitment. Short-term investments often carry a higher risk of capital loss, and this information is vital for determining the appropriate risk profile for your investment.
Deciding on your investment duration provides a broader perspective, allowing you to assess your risk tolerance more accurately. With a detailed understanding of when you plan to liquidate your investment, you can align your risk profile with the specific unit trust that suits your financial goals. This involves considering factors such as market volatility, fund management practices, and the historical performance of the unit trust fund.
2. Know What You’re Investing In
Investing in stocks is too complicated for beginners. Since unit trust is a collection of stocks and bonds bought with a joint fund, you need at least a basic understanding of the trust profile. Find out the unit trust’s key features — it could be solely investing in technology assets, equities of top-performing global companies, ESG-compliant enterprises, or shariah-compliant stocks within selected sectors or markets.
Aside from that, examine details such as the distribution policy, fund management service fee, and other additional charges (e.g., entry fee, exit fee, trustee fee). It is worth noting that unit trusts are not all created equal when it comes to distribution (colloquially known as ‘dividends’). Some funds are incidental, others are required to provide it annually. This information will help you determine whether this unit trust is potentially lucrative or not within your time frame.
3. Refrain from “Timing the Market”
Investment in Malaysia — or any other place — is unpredictable and can be frustrating if you cannot keep a calm composure. It’s best to avoid timing your entries or exits in the market. (That’s different from having an exit strategy!) Your unit trust may not look so good today; there’s a possibility that it will bounce sometime in the future. Perhaps in the next week or month. If you always sell when the market is down to cut potential capital loss, your investment will run out before you know it. You might not be able to recuperate the administrative fees and charges before you see appreciation or distribution.
Market unpredictability can indeed be frustrating, especially when short-term fluctuations challenge investor composure. To enhance this understanding, investors should recognise that the financial landscape is influenced by various factors, including economic indicators, geopolitical events, and global trends. Developing a comprehensive awareness of these factors can contribute to a more informed and less emotionally charged investment strategy.
While distinguishing between market timing and having an exit strategy is mentioned, it’s important to underscore the significance of the latter. An exit strategy serves as a crucial component of a well-thought-out investment plan. Investors should define specific conditions under which they would consider selling, such as reaching certain financial goals or encountering unexpected changes in personal circumstances. This approach helps in maintaining focus amid market volatility
4. Keep a Clear Head
There are many cases of disappointed investors who invest in a unit trust because someone they know boasts about it online. Be as steady as the beating drum, and always use your logic over emotions when investing. Rash decisions can cost you hundreds and thousands of ringgits.
Have you ever heard of Dollar-Cost Averaging (DCA)? Meet its Malaysian equivalent, the Ringgit Cost Averaging (RCA). They share the same principle: you’re advised to top up your unit trust investment regularly, and consistently, irrespective of the price. With this strategy, you’ll be able to average out your cost of investment. In short, you can minimise potential loss while benefiting from the accrued units which contribute to your potential distribution.
5. Diversify Your Investment in Malaysia
Put your eggs in different baskets. It can be a double-edged sword if you put all your money into one investment in Malaysia. When the market takes a dip, the loss will be significant. But as the market recovers and value increases, you enjoy a total return on investment.
The wise move is to portion out your money and put it into different investments. The portions can be up to you, depending on your goals and risk profile. You can split 50/50 between a unit trust and a fixed deposit if you’re more conservative.
While it is true that concentrating all your funds on a single investment exposes you to significant risk, the concept of diversification goes beyond merely spreading investments across different assets. Investors should consider diversifying across various asset classes, such as stocks, bonds, real estate, and even geographical regions. This broader approach helps mitigate risks associated with specific market movements or economic conditions that may affect a particular sector.
6. Review Your Portfolio Periodically
See if your unit trust overperforms or underperforms compared to other considerable investments. You may cash out your investment once your goal has been achieved or if you see that the investment no longer performs as you expected it to. To be on the safer side, set a number on how much you plan to earn from your investment. That way, you can make your exit when the investment falls below your threshold with minimal and palatable capital loss.
The unit trust can be a convenient and effective channel for long-term investors looking for wealth creation and preservation. However, it’s best to understand that unit trusts are not immune to market fluctuations. Fund managers will try their best to maximise their returns based on the trust document creating the fund as well as prevailing market conditions. Continuous education is essential for investing in unit trust and any financial investments to make an informed decision.
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