TOPIC 5

INVESTING IN UNIT TRUST/MUTUAL FUNDS

School of Accounting and Finance

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Learning Objectives
1) Explain the characteristics of mutual fund
investments.
2) Classify mutual funds by investment objective.
3) Evaluate mutual funds.
4) Describe how and why mutual funds are bought
and sold.
 Characteristics of Mutual Fund Investments

• Mutual Funds is an investment vehicle for those who wish

to:
• Pool money
• Buy stocks, bonds, and other financial securities
• Have buy/sell decisions made by a fund manager

• Many mutual funds chosen for inclusion in retirement

account investments
 How Unit Trusts Work

Source : FIMM (2013) Start the journey to financial freedom with unit trusts
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https://www.fimm.com.my/wp-content/uploads/2014/10/FIMM_Booklet_Web.pdf (accessed 4 February 2015)
 Why Investors Purchase Unit Trusts
o Diversification
• Investor’s funds are used to purchase a broader range of investments
• Risk reduction
o Asset liquidity
• Easy selling and buying of units compared to direct investment in shares where
prices and opportunities depend on availability of both buyers and sellers
o Continuous professional management
• Fund managers are full time and should possess the necessary skills, experience
and dedicated resources to maximize investments.
o Access to broader range of financial assets
• Fund managers can trade investment products normally not accessible to individual
investors
o Tax benefits - Capital profits are tax free
o Affordability – Smaller initial capital outlay
Source : FIMM (2013) Start the journey to financial freedom with unit trusts
https://www.fimm.com.my/wp-content/uploads/2014/10/FIMM_Booklet_Web.pdf (accessed 4 February 2015)
 Advantages and Disadvantages of investing in Unit
Trust/Mutual Funds

Pros
• Diversification
• Professional Management
• Ease of buying and selling
units
• Multiple withdrawal options
• Dividends and capital gains
• Switching within same fund
family
Cons
• Purchase/Withdrawal costs
• Management and administration
fees
• Performance may not exceed index
• Inability to control when capital gains
occur
• Potential market risk
• Some aggressive/unethical sales
staff.
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 Characteristics of Funds
• Closed-end funds
• Fixed number of shares
• Trade like shares of common stock
• Actively managed
• Price determined by supply and demand

• Exchange-traded funds
• Replicate the composition of a specific securities index
• Low Management Fees
• More passively managed compared to closed and open end funds

• Open-end mutual funds

• Shares issued and redeemed on demand
• Investors free to buy and sell shares at the net asset value
• Actively managed
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http://www.bursamalaysia.com/market/securities/equities/prices/#/?
filter=BS08&board=ETF&page=1

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http://biz.thestar.com.my/news/story.asp?file=/2011/11/12/business/9729858
http://www.thestar.com.my/Business/Unit-Trust/
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Advantages and Disadvantages of ETFs

Source : Keown(2013)
 Unit trust funds in Malaysia
Summary of Statistics as at 31 December 2016
No. of Management Companies 35
No. of Approved Funds* 636
– Conventional 437
– Islamic-based 199
No. of Launched Funds 627
– Conventional 429
– Islamic-based 198
Units in Circulation (billion units) 496.852
– Conventional 368.699
– Islamic-based 128.153
No. of Accounts# 18,549,134
– Conventional 15,726,808
– Islamic-based 2,822,326
Total NAV (RM billion) 358.471
– Conventional 297.556
– Islamic-based 60.915
% of NAV to Bursa Malaysia Market Capitalization
21.50%
Note:- Effective January 2009, the above statistics will not include statistics for wholesale funds
* Includes funds approved but not yet launched
# Not including unitholders account at IUTA that operates nominee account system

Source: Securities Commission , http://www.sc.com.my/data-statistics/unit-trust-funds-in-malaysia-summary-of-statistics/ 13-13

 Net Asset Value
• Net asset value (NAV):
The value of the fund’s portfolio minus liabilities divided by
the number of outstanding shares/units

Net Assets In unit trust funds – Use

NAV  units outstanding for the
Shares Outstandin g denominator

• NAV calculated at the close of trading

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Source : Federation of Investment Managers Malaysia https://www.fimm.com.my/industry-statistics/yearly-statistics/f
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Source : FIMM Website : https://www.fimm.com.my/industry-statistics/yearly-statistics/
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 Costs of investing in unit trust/mutual funds

• Sales charges (Commission)

• Load – Sales charges paid upon purchase of units
• Non-Load – No middle man- deal directly with investment company
• Contingent Deferred – Sales charge charged upon withdrawal

• Management fee
• USA - Charged yearly (.25%-1.5% average) based on a percentage of firm’s asset
value

• Other fees
• Annual fee to defray advertising and marketing costs

• Expense ratio
• Total expenses associated with the management fees and operating costs of the fund
 Unit Trust Charges in Malaysia
• Initial Service Charge
• Levied primarily to cover the marketing and distributing units and
monitoring his investments by the unit trust consultant for the
duration the unit trusts is held.
• Exit Fee
• Sometimes referred as repurchase charge. This fee represents a
deduction by the UTMC from the proceeds of disposal of an
investor.
• Annual Management Fee
• Expense for portfolio management, the manager’s fees, trustee
and custody costs, audit fees, administrative charges like printing
of annual reports, distribution cheques, postage and other
services properly incurred in the administration of the fund.
• These costs are paid out of the fund’s assets.
https://www.fimm.com.my/investor/abc-of-unit-trusts/understanding-unit-trusts/
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 The Star Online -- Saturday November 12, 2011
High fees dampener for unit trust
By DALJIT DHESI

Abstract

Source : The Star Online (12/11/11) http://biz.thestar.com.my/news/story.asp?file=/2011/11/12/business/9729858

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 Classification of Mutual Funds

Long-term
Funds

Stock Funds Bonds Funds Other Funds

 Equity Funds
Long-term
Funds

Stock Funds Bonds Funds Other Funds

Aggressive Growth
Price growth vs.
Growth
Dividend Income
Equity income
Small-cap
Mid-cap Company Size
Large-cap
Global
% U.S. vs.
Regional
International
International
Index funds Match index holdings
Sector funds Economic Sectors
Invest in socially
Socially responsible
responsible firms
 Bond Funds
Long-term Funds

Stock Funds Bonds Funds Other Funds

High-yield

Intermediate
Corporate bonds
Intermediate U.S.
Gov't bonds
Long-term
corporate bonds
Long-term U.S.
gov't bonds

Municipal bonds

Short-term
corporate bonds
Short-term
U.S.gov't bonds
World Bond
Funds
 Other Funds
Long-term
Funds

Stock Funds Bonds Funds Other Funds

Asset Allocation Funds

Balanced Funds

Fund of Funds

Lifecycle Funds

Money Market Funds

 Types of Unit Trust Funds in Malaysia
 Equity Funds – Aggressive, Index, International Equity Funds

 Fixed income funds - Invest mainly in Malaysian Government Securities,

corporate bonds, and money market instruments such as bankers
acceptance and fixed deposits.

 Money Market Funds

 Real Estate Investment Trusts (REITS)

 Exchange Traded Funds (ETF)

 Balanced Funds

 Syariah Funds
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Types of Unit Trust Funds in Malaysia

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Types of Unit Trust Funds in Malaysia

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 Attendance Question
• Rank the unit trust funds in terms of risk:
• Equity Funds
• Bond Funds
• Dividend Funds
• Balanced Funds

• Name two (2) types of common fees charged on unit

trusts Sales Charges

Log On to Times OR
https://docs.google.com/forms/d/e/
1FAIpQLScQQX5wEAZJ_MrLzmhFmGg-
zOH9r_t39KOW1iU27EfreBe2uQ/viewform
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Source: Money Sense Singapore
http://www.moneysense.gov.sg/understanding-financial-products/investments/types-of-investments/unit-trusts.aspx

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 Managed Versus Index Funds

• Managed fund  a fund manager makes all decisions

regarding what securities are included in the fund’s
portfolio

• Index fund  securities held by the fund replicate those

contained in a specific index ( e.g. S&P 500, Nikkei,
Dow Jones)
 Sources of Fund Information
Professional Advisory Services
• Lipper Analytical Services
• Morningstar, Inc.
• Value Line
• Mutual fund newsletters
• Available in libraries and from brokerage
firms and online
Source : Lipper Leader’s Rating : http://www.lipperleaders.com/

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 Example of Malaysian Unit Trust Prices Quotes

Source: Signal Invest

http://www.invest.com.my:8080/personal/funds/price/ 13-35
Example of Malaysian Unit Trust Prices Quotes

Source : The Star Online 13-36

http://www.thestar.com.my/Business/Unit-Trust/
Unit Trust/Mutual Fund Prospectus
• Fund objective(s)
• Statement describing the risk factors
• The fund’s past performance
• The type(s) of investments in the fund’s portfolio
• Information about dividends, distributions and taxes
• The fund’s management
• Limitations or requirements for the fund
• Procedure to buy or sell shares
• Services provided to investors
• Turnover ratio of the fund’s investments
 Unit Trust - Information to look for in the prospectus:
• Investment Objective, Focus and Approach – Check whether the fund’s investment
objective, focus and approach match your own investment goals.
• Types of investments in the fund’s portfolio
• Risks – Find out what are the risks of investing in the unit trust and check whether
they match your risk profile.
• Performance – Although the past performance of a fund is not indicative of its future
performance, it is useful to compare the fund’s performance to its benchmark and
other funds with similar investment objectives.
• Information about dividends, distributions and taxes
• Fees and Charges – Check what you need to pay and compare them with similar
funds.
• Information on the shareholders, board of directors and management of the company.
• Any specific features and constraints which may conflict with your needs and
preferences.
• Subscription, Redemption and Switching of Units – The procedures for subscribing to
the unit trust, redeeming your investment and switching to another unit trust are
described in the prospectus. Source : Lecture notes and FIMM(2015)
• Turnover and expense ratios https://www.fimm.com.my/investor/faqs/
• Services provided to investors
The Unit Trust Company must be able to clearly explain:

• The investment objectives of the unit trust fund;

• All the fees and/or charges involved in the purchase and thereafter and
their breakdown;
• The prices of units and how they are worked out;
• The risks of investing in the unit trust fund and in unit trust funds generally;
• The minimum investment in the unit trust fund;
• Any special tax implication of investing in the unit trust fund;
• Any unique features and/or restrictions of the unit trust fund;
• The long term nature of most investments in unit trust funds and the risks
of early withdrawal from the unit trust funds;
• The risks involved if purchasing the unit trust fund using a loan facility; and
• The distribution policy of the fund.

Source : FIMM (2015)

https://www.fimm.com.my/investor/faqs/
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 Other Sources of Fund Information
• Mutual fund annual report
• Performance, investments, assets and liabilities

• Financial Publications
• Bloomberg Businessweek, Forbes, Kiplinger's Personal Finance,
Money, and The Wall Street Journal
• The Edge Malaysia, The Star Biz, Personal Money
• A mutual fund’s information usually includes:
• Fund’s overall rating compared to all other funds,
and to funds in the same category
• Fund size, sales charge and expense ratio
• Historical returns for the past ten years
 The Mechanics of a Unit Trust Transaction

• Open an account:
• RM 500 to RM 1,000 and up depending on the fund family and
the fund (current rm10)
 Return on Investment
3 Ways to Make Money on Unit Trusts
Income Dividends
• Earnings paid from dividend and interest income
• Taxed as ordinary income
Capital Gains Distribution
• Distributions when the fund buys and sells securities
• Taxed as long-term gains
Capital Gains (or Losses)
• Capital gains (or losses) when you sell shares at a price
different than price you originally paid
• Taxed as short- or long-term gains
 Purchasing Open-End Fund Shares
• Regular account transactions
• Easiest
• Simply buy shares in amount and when desired

• Voluntary savings plans

• Allows for smaller than usual purchases on a recurring basis

• Contractual savings plans

• Require regular purchases over a specified period
• Sometimes called “Front-end Load Plans”

• Reinvestment plans
• Automatically reinvests dividends and capital gains in the fund
 Purchase Options

Fund Type Purchase From

Closed End Stock exchange or Over-the-counter
Exchange Traded market

No Load Fund Management Co. Fund

Open End
Load Authorized Agent Supermarket*
*
* Investor may deal with one company, get one statement,
yet have a choice of a wide variety of funds
 Unit Trusts Withdrawal Options

1. Withdraw a fixed dollar amount each period until account

exhausted
2. Liquidate or “sell off’ a certain number of shares each
period
3. Withdraw a fixed percentage of asset growth; principal
untouched
4. Withdraw all income dividends and capital gains
distribution; principal untouched
Note for potential mutual fund/unit trust investors
• Match the fund(s) chosen with your financial goals
• Funds that focus on shares are riskier but offer higher returns
• Before purchase - Review the funds performance
• At least 5 to 10 years past record
• Compare with a benchmark or category index
• Compare fund fees with other funds in the same category
• Determine your risk profile
• Make sure you are comfortable with the fund’s risk
• Beware of unit splits especially for smaller funds
• Keep track of fund’s performance and change in focus (if any)
• Funds with more assets are more difficult to manage and thus are less
flexible May affect performance of units
• Past performance is no guarantee of future performance
• Review your investment at least once a year or if your financial situation has
http://www.investsmartsc.my/investment-product/unit-trusts
changed. 13-47
 Risks associated with investments in unit trusts:
• Market risk - Uncertainty as a result of global, regional or national
economic conditions, governmental policies or political developments
• Liquidity risk - If a fund comprises a security that becomes
temporarily/permanently illiquid or difficult to sell, the fund manager may
dispose the security at a discount to its fair value.
• Management risk - Poor management can cause considerable losses to
the fund causing negative effect on the capital invested.
• Inflation risk – Funds may occasionally incur losses or may generate
returns that may not be sufficient to keep in pace with the general rate of
increase of price levels (i.e. inflation)
• Interest rate risk – Prices of fixed income securities (e.g. bonds) are
sensitive to interest rate changes. The general interest rate environment
of the country may affect the value of the investment even if the fund (e.g
Syariah Fund) does not invest in interest bearing instruments.
Source
:https://www.fimm.com.my/investor/abc-of-unit-trusts/understanding-unit-
Risks associated with investments in unit trusts (Cont/…) :
• Loan financing risk
• Occurs if the investor has borrowed money to finance the purchase of unit trusts.
• Unit trust returns are uncertain – there may be times when the value of the unit
trust holdings falls below the loan collateral and the individual may be required to
top-up his/her investment
• If the interest rate rises- loan repayments could increase as well.
• Country and currency risk
• Occurs if the investments are denominated in foreign currency
• Risks of any changes in the country’s political, regulatory or economical
situation in the foreign country that may adversely affect the value of the
investment
• Equity investment risk – i.e. Market risks

Source : SIDC (2015), Investsmart – The risks of investing in unit trusts

fhttp://www.investsmartsc.my/investment-product/unit-trusts
 UNIT TRUST – COOLING OFF PERIOD

• Cooling-off period – Period of six(6) business days from the

date of purchase to give him an opportunity to reconsider.

• If the investor decides to exercise this right, he/she should be

entitled to a full refund of your application money.

Source : Federation of Investment Managers Malaysia (2015)

Investors :Frequently Asked Questions (No. 22)
https://www.fimm.com.my/investor/faqs/
 Information on Unit Trust

https://www.fimm.com.my/investor/abc-of-unit-trusts/

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http://www.investsmartsc.my/investment-product/unit-trusts
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