A Unit Trust is an investment scheme that pools money from many investors who have similar investment objectives, strategies and risk appetites. The pooled moneys are then invested into a diversified portfolio of investment assets, such as shares, bonds, and cash equivalents.
Lets look at how you can get favorable returns when investing in unit trusts.
Golden Rule No 1: Invest long-term
It is important to know that when when investing in unit trusts, it should be a long-term game. But how long is long, you may ask?
Unit trusts need to be invested for at least 10 years to see favorable results. As upfront service charges maybe relatively higher than investing in shares, it is advisable to keep it there for the longer term.
If you invest in a fund which gives consistent distributions, the distributions declared will eventually bring down the average cost per unit of your fund. And the longer your maintain your fund, the lower you will see your average cost per unit.
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.“Warren Buffett
“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”Warren Buffett
Investing is not trading. Investing has a totally different objective. Investing is about minimizing risk to generate wealth over the long term. Do some homework about the fundamentals and financial status of the stocks invested, the direction and management of the company and the industry potential.
Golden Rule No 2: Dollar Cost Average
When investing in unit trusts, it is important that you do dollar cost average (DCA). Dollar cost average means investing a fixed amount on a regular schedule, usually on a monthly basis. Investors get more units when prices are low and fewer units when prices are high.
DCA works favorably for funds with a higher volatility factor and consistent distributions.
Golden Rule No 3: Value Cost Average
While Dollar Cost Average means putting a fixed amount in regular intervals, Value Cost Average means investing a lump sum when prices are low to bring down their average cost by a substantial percentage.
If RM 1.00 drops to RM 0.50 how much have we lost? 50% right?
If we purchase then at RM 0.50 and it goes back up to RM 1.00, how much have we gained?
Most people would say 50%, but look carefully. Do the math. 0.50 to 1.00 is doubling up, which means we gained 100%.
Let’s take a look at this illustration below:
Having said that, do ensure that the fund stocks have strong fundamentals meaning the fund consists of stocks which are of value when investing in unit trusts.
Golden Rule No 4: Have a balanced asset allocation
As we all know, the popular term in investment is ‘Don’t put all your eggs into one basket.’ The same holds true when investing in unit trusts.
Although the funds asset allocation are already pretty diversified in different asset classes eg. industrial, consumer, technology, telecommunications, etc., we can also spread out our portfolio to:
- local, regional and global
- equity, balanced and bonds
- big cap, mid cap and small cap.
For the younger group, investing in some bonds or money market funds acts as a reserve when there’s a huge market correction. Switch over some of your bonds/money market funds to your equity funds (Value Cost Averaging principle) to bring down your average cost per unit.
Golden Rule No 5: Reinvest your distributions
This rule is more applicable for the younger age group, from your 20’s to 40’s. Reinvesting your distributions will bring down your average cost per unit in the long run.
Leverage on the power of compound interest when you reinvest your distributions.
Golden Rule No 6: Choose a reliable fund management company with strong fundamentals and good investment track record
There has been cases where smaller fund houses were founded and went bust. Qualification of the fund managers were questionable. Do your homework on the fund management company before entrusting your money with them.
Be wary of money games and ponzi schemes that promises a monthly return of 3-10% (?!) No proper and legitimate investment vehicle promises those kind of returns. Get out while you can.
A legitimate investment company would be regulated by FIMM (Federation of Investment Managers Malaysia) and Securities Commission and are willing to disclose their financial statements.
Remember These Rules When Investing In Unit Trusts
Do make sure you abide by the six golden rules when investing in unit trusts. More importantly, do consult your trusted unit trust consultant/financial advisor/investment professional who have extensive experience in the field before embarking on an investment plan.
About the Author
Avril Yap, CFP , IFP, CBC, is a practitioner with a large fund house. She is passionate in empowering people with money management and investment skills as doing so will enable them to fulfill their purpose, live meaningful lives and have better relationships. Her vision is to develop more individuals to be CFP Practitioners with a focus on self growth and strong positive values.