A unit trust is one of the well-accepted investment alternatives in Malaysia due to its flexibility and passive involvement required, compared to stocks. If you are looking to start your investment in unit trust without paying too much, try doing it on your own instead. But first, here are some basic things you need to know before going down that road.
According to The Star’s report in July, the entry fee at 5% to 6% imposed on total funds invested in Malaysia’s fund management industry is among the highest in the world.
Worrying that this high fee affects the industry’s competitiveness, some industry players are suggesting a lowering of this particular fee, said to be used to cover marketing and distributions costs of unit trusts and other investment products.
CompareHero.my has reached out to one of the well-established online unit trust platforms Fundsupermart.com and spoke to its general manager, Wong Wei Yi for brief guidelines on how to ‘DIY’ your unit trust investment.
In an exclusive email interview, Wei Yi (WY) shares his professional comments and guidelines of common questions all beginners may have. Here goes:
Q: What is the minimum capital required to invest in a unit trust, on average?
WY: Most funds require a minimum initial investment amount of RM1,000 and subsequent investment amount is only RM100. So, for those who have a steady income, it is really affordable to start early financial planning using unit trusts.
Q: What is the ideal timeline to invest in a unit trust?
WY: Investing in a unit trust is for the long term. However, our research team recommends that a 3 to5-year view would be sufficient for the average portfolio. There are different solutions for each different timeline of the investment portfolio.
For example, if someone looks to invest for just a year, it probably means that the person will not have much capacity to take risks, so the person can form a portfolio with safer bond funds and money market funds.
On the other hand, if the investor has a long investment horizon, like more than 10 years up until retirement, then his portfolio could comprise more of the riskier funds like equity funds.
Q: What are the charges involved to invest in a unit trust?
WY: Some fees may differ for funds and providers. The common ones would be sales charge and management fees. The sales charge is paid up front and it is the commission for distributing the product. This may differ from different channels of distribution (such as banks, agents, and online platforms) for the same unit trust.
The management fee is the fee charged by the fund manager for managing investors’ monies in the unit trusts, which usually ranges from 0.5% to 2.5% (depending on the complexity of the fund).
Tip: Bond funds usually have lower management fees compared with equity funds.
Note that management fees are already built into the net asset value (NAV) of the fund, meaning that a minimal amount is deducted from the assets of the fund on daily basis over the period of investment.
For some funds, there is a redemption fee within a specified period. For example, if you invest in such fund and decide to redeem within 3 months, a redemption fee of 0.5%-1% as specified by the fund may be charged from your redemption proceeds. Redemption fees are charged to discourage investors from actively trading in the fund as it can be disruptive to the manager’s investment.
As for FundSuperMart.com, we charge platform fees for selected bond funds of 0.2% per annum. After dropping 1%- 1.5% of a sales charge, we hope this will encourage investors to invest in bond funds and create a more diversified portfolio.
Q: Is it cheaper and easier to invest in unit trust online?
WY: For now, it is definitely cheaper and easier to invest in unit trust through an online platform. The online trend is actually quite common in the developed countries because it takes out a lot of paperwork for the investors. Investors can invest anywhere, anytime instead of meeting agents or queuing in banks.
Also, investors can easily monitor the performance of their portfolio when they log into their online portal account. This is important because given the volatility and dynamics of the financial markets now, an investor should have higher flexibility to make timely changes to their portfolios.
Online channels are better in being cost-efficient. Digital firms require fewer offices and much lesser manpower as they leverage the technology to distribute unit trusts effectively. This results in massive cost savings compared to traditional channels and these cost savings can be shared with the investors in the forms of lower sales charge.
Q: Based on the current market condition, where do you see the opportunities and what is your expectation on the financial market moving forward?
WY: Although valuations for equities, on aggregate, are expensive at this juncture, we believe that there are still pockets of opportunities to be found, especially within the Asia ex-Japan region. The Asia ex-Japan region remains to be one of the fastest-growing regions globally.
In the latest release of World Economic Outlook by the International Monetary Fund (IMF), the international organization projected that the region is poised to post GDP growths of 6.4% and 6.3% for 2016 and 2017 respectively.
Likewise, the Asia ex-Japan region, as represented by the MSCI Asia ex-Japan Index, was trading at a price to earnings (PE) ratio of 13.7X (as of 27 July 2016), relatively lower compared to our fair PE estimate of 14.5X. This represents a potential upside of 39.7% by end-2018.
Tip: the lower the actual PE ratio, it means the more undervalued a fund or an equity is.
On market prospects, we believe that an environment of positive growth, low inflation, and accommodative central banks should continue to be positive for earnings and stocks. This indicates that equities should edge higher going forward with the support of gradual growth in corporate earnings.
Investment is a long journey and you enjoy fruitful returns with patience, knowledge, and the right platforms. Be mindful with your current portfolio and take chances to invest now with an outstanding personal loan to achieve your financial goals if you do not have enough capital!
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