A unit trust is a form of a collective investment scheme that allows investors to pool their money for the purpose of investing in the Malaysian stock market and other approved investment portfolios (Hassan, 2016). The unit consists of three parties, the fund manager, the trustee, and the unit holder (Hassan, 2016). A unit trust is governed by a trust deed that outlines the objectives of the fund, the investment style, and the relationship between the unit holders, the fund manager, and the trustees (Fabozzi and Markowitz, 2011). The fund manager is responsible of investing the funds of the unit trust while the trustee who is independent of the fund manager ensures that the fund manager carries out its duties in accordance with the trust deed (Fabozzi and Markowitz, 2011).
Liquidity – Harvey can always redeem his units by asking the fund manager to repurchase the units he holds.
Professional management – Harvey will have his money managed by a professional money manager.
Cost savings – investing through a unit trust will lead Harvey to incur lower transaction costs and other fund administrative costs due to the economies of scale enjoyed by the fund manager.
However, in spite of all these benefits, Harvey needs to consider the following five factors befor investing in unit trusts:
Risk profile refers to an investor’s attitude to take up risk (Brentani, 2004). Investors fall into three categories according to their risk profile: risk averse, risk neutral, and risk seeker. Harvey must check the information prospectus of the fund and ensure that the fund investment strategy is in line with his risk profile. For instance, if Harvey is risk averse, he should seek a fund that uses conventional strategies. On the other hand, if Harvey is a risk seeker, then he can invest in a unit trust that uses a contrarian strategy (Swart, 2002). However, if Harvey is risk neutral, he will be indifferent to a fund that uses either conventional strategies or one that uses contrarian strategies (Swart, 2002).
Time horizon refers to how long an investor is willing to invest in the unit trust. Investors obtain better returns when they invest over a longer time horizon than when they invest over a short time horizon (Swart, 2002). Considering that Harvey is young (only 25 years old) and his wife is only twenty-two, he is able to invest over a long time horizon. In this case, unit trusts would be an ideal choice because he will be able to compound his returns over a long period.
Affordability refers to the amount of unit trust investment an investor can comfortably purchase without a financial strain. Harvey earns $7,000 out of which he contributes to EPF and SOCSO. Harvey also has a car loan commitment of $80,000. He is also planning to marry. Consequently, his personal expenses are likely to rise. Given all these factors, Harvey should take a minimum investment in the unit trusts and then grow his investment as his income improves.
. Analysing the prospectus will help Harvey to determine whether the fund is a suitable investment by becoming familiar with the fees and charges, investment objective, and investment strategies. In addition, Harvey will be able to determine whether the unit trust is Shariah-compliant.
Risks of investing in unit trusts, Harvey should be aware of the various risks of investing in unit trusts. Hassan (2016) classifies the risks into general risks and specific risk. General risks includes risks such as non-compliance to rules and regulations, loan financing risk considering (Harvey is getting a $10,000 cash advance from Credit Card), and inflation risk. Specific risks include reinvestment risk, market risk and liquidity risk.
References
Brentani, C. (2004). Portfolio management in practice. Oxford [England]: Burlington, MA.
Fabozzi, F. and Markowitz, H. (2011). The theory and practice of investment management.
Hoboken, N.J.: John Wiley & Sons.
Hassan, M. (2016). Malaysian Industrial Development Finance Berhad. [online] Midf.com.my.
Available at: http://www.midf.com.my/index.php/asset-management-resources-center/risk-factors-of-investment-in-unit-trusts [Accessed 18 Jul. 2016].
Swart, N. (2002). Personal financial management. Lansdowne: Juta.
