Unit Trust. Learning Goals Understand what is Unit Trust. Differentiate between type of Unit Trust and type of Unit Trust fund.

Unit Trust

Learning GoalsUnderstand what is Unit Trust.Differentiate between type of Unit Trust and type of Unit

Trust fund.

What is Unit Trust?A pooled investment plan where the capital

contributions of investors are combined into a legally formed trust fund

Then invested by professional fund managers, acting on behalf of the investors, in a portfolio of marketable securities

“Trustee” is appointed to safeguard the rights and interests of the investors

Investors receive “Units” (shares) in proportion to the amount of money they have contributed to the fund

Income derived from dividends, interests and capital gains are divided among the unit holders in proportion to their investments.

An indirect investment. It is also called investment companies.

Unit Trust investment offers a reasonable amount of return with minimal risk. It is done by professional management at minimal cost, minimizing, liquidity, and capital appreciation

Investors money will be pooled together to be invested in a single diversified investment portfolio which comprise stocks, bonds and others in accordance with the investment objective

One important feature of unit trust is that professional fund managers are employed to manage the funds. They are highly qualified and experienced in investments.

Who Are The Unit Trust Investors?Small or retail investors who neither have the

time nor the know-how to hold portfolios through direct investments.

Many are highly inexperienced; as a result they turn to these unit trusts management companies to act on their behalf.

How a Unit Trust Work? Trust deed

An agreement that binds 3 parties (namely, Unit Trust Management Company, the trustee and the unit trust fund’s investors – also called as unit holders) to the deed.

The trust deed will have to be registered with the Securities Commission. A copy of the trust deed can be bought at the management company.

Trustee Can be the Public trustee of Malaysia or any independent trustee of

Malaysia or any independent trustee companies. A trustee is generally reputable financial institution appointed by a

deed of Trust to look after the interest of the unit holders. An independent Trustee is appointed to ensure compliance of the

management company with the requirements of the Trust Deed, Securities Commission’s guidelines on Unit Trust Funds and Securities Commissioner Regulations 1996

As the legal owner of the assets of the fund, the trustee is responsible to ensure that the fund manager invests the funds according to the trust deed.

Management Company The promoter of the fund to the public and provides investment

expertise to manage the fund and has the primary responsibility of investing the funds according to the objectives.

The Management Company also acts as the Registrar of the fund maintaining the records of the unit holders

Investors or Unit holders  The providers of funds through purchase of unit trusts from the

management company would expect to receive benefits from the investment.

If it is an Open-end Fund, the investors can buy units at anytime, as long as the fund has not reached its maximum approved size.

They can also sell the unit trusts back to the management company,.

  The Securities and Exchange Commission 

Responsible to safe guarding the interests of the investors who make investments in unit trusts.

SEC formulates regulations for the operation of unit trusts and has the necessary power to ensure the proper conduct of the business.

It also has the power to license or suspend the licenses of Management Company to operate unit trusts.

Types of Unit TrustOpen-End Fund

Investors buy and sell shares directly with the mutual fund company without a secondary market

Have an unlimited number of sharesPurchase and selling price is determined by the Net

Asset Value (NAV) of the fundAll purchases and sales are completed at the

end of the day after the stock markets have closed

Close-end fundSell only the initial offering

Subsequent trades are done in a secondary market, similar to the common stock market

Have a limited number of sharesInvestment advisor doesn’t have to worry about

cash inflow or outflowsPurchase and selling price is determined by supply

and demandGenerally sell at premium or discount (usually

discount) to NAV

How is close-end fund structured Has board of directors elected by the

shareholders. The board of directors will appoint the fund

manager for research, portfolio management and the administration of the fund.

The fund manager will make recommendation for investments.

The investment committee will make decisions on investments.

The public trustee will be responsible to disburse the fund for investment.

Unit Investment TrustFixed pool of securities, normally bonds

Not actively managed; securities in portfolio remain static

Have shares that represent a proportionate share of the trust

A portfolio of shares is put together by the trust sponsor and these shares are held in safekeeping under conditions set down in a trust agreement.

Redeemable trust certificates will be sold to investors at NAV plus a small commission.

Real Estate Investment Trusts (REIT)

Closed-end investment company that invests in mortgages and various types of real estate investments

Provide high dividends along with capital appreciation potential

Types of REITsProperty/equity REITs invest in shopping centers,

hotels, apartments, office buildings and other real estate

Mortgage REITs invest in mortgages

Hybrid REITS invest in both properties and mortgages

Types of FundsEquity Fund

Primarily invest in the stock market. High level of risk and are expected to provide a high

return in the long term. Growth Funds and Index Funds fall into this

category of unit trustsIncome funds

It produces high level of current income- invest in high-grade shares that pay good dividend.

Established companies and generally viewed as low-risk.

Invest in fixed income securities.

Balanced fundsGenerates a balanced return of both current income

and long-term capital gainsInvest in blend of fixed-income securities and

common stocks, with 30% to 40% in fixed incomeAllocation between stocks and bonds typically

remains constant or varies very littleEmphasis between fixed-income and common stocks

can be shifted as market conditions changeLess risky investments for relatively conservative

investors looking for moderate growthGrowth Fund

The primary goal is capital gain and long-term growth.Normally offer little dividends or current income.

Because of uncertain long-term perspective, it can be quite risky.

Aggressive Growth Fundhighly speculative mutual fund that seeks large

profits from capital gainsInvest in small, unseasoned companies with high

price/earnings ratiosOften look for turnaround situationsPrices are often highly volatileHigh risk investments for very aggressive investors

Islamic FundFund will invest in shares which complies with

syariah Principles. The Syariah Principles distinguishes between

‘halal’ and ‘non halal’ type of business activities. The returns received would depend on whether

investment objective is for growth, current income or a combination of growth and current.

Bond FundsInvests in various kinds and grades of bonds, with

income as primary objectiveAdvantages of bond funds over individual bonds:

More liquid Offer high diversification Bond funds automatically reinvest interest

Lower risk investments for investors who are looking for steady income

Some price volatility occurs with changing interest rates

Property trust funds Special type of close-end fund where it invests

mainly in real property rather than in shares or bonds. Because of the nature of the investment, the returns are highly speculative.

Advantages of Unit Trust Diversification

Many investors lack sufficient resources to establish an adequate diversification on their own.

  Funds with variety of objectives

Different types of funds are created for different investment objectives. So investors should have no problem finding funds that meet their objectives in terms of return and risk

  Record keeping services.

The management company maintains and administers the records of shareholder’s activity for a given year. This is a great convenience for the investors.

  Professional management

Fund managers who are knowledgeable about investment and they have good track records of performance, high integrity, etc.

  High liquidity

Unit trust can be bought and sold easily. Thus they do not suffer from liquidity risk.  Affordability

Only a small amount of money is needed to participate in a portfolio of investment which enjoys the same benefits as in direct investment which requires large amount capital.

Disadvantages of Unit TrustLoad fee

This is sales charge added to the fund’s NAV when unit trust is sold. It is as high as 10%.   

High annual expenseThe operating expenses like accounting, legal,

postage, management fees have to be borne by the investors.

Transaction costs. Management companies must also pay transaction

costs to buy and sell securities even though they trade in large blocks..

Does the Price of Unit Trust fluctuate? Unit prices could rise or fall due to value changes of the

underlying securities owned by the Trust Fund.  The value of equity fluctuates due to changes in the share prices

in the Malaysian Stock Exchange. The value of fixed income securities will change due to change in

interest rates in the market. Returns on Unit Trust can be determined using the below

measurement.

Holding period = Selling price – Purchased price + dividendReturn Purchased price Return of the fund = new NAV – old NAVBased on NAV old NAV

Market returns = new KLCI – old KLCI Old KLCI

Changes of funds return = Return on NAVRelative to market return market return

Determine the Price of Unit TrustDetermined by Net Asset Value (NAV) of the

funds managing the portfolio excluding any liabilities incurred and the number of units in circulation.

NAV represents the underlying value of a unit share of stock in a particular unit trust.

NAV is found by taking the total market value of all securities held by the fund, less any liabilities and divided by the number of units on issue.

NAV = Value of Assets - liabilities No. of units outstanding