Monday December 18, 2006
THIS is the second article in a series of articles by the Securities Industry Development Centre on smart investing. 

IN the usual interaction between a unit trust agent and an investor, you normally see an agent doing most of the talking and the investor mainly listening. Not many pertinent questions are asked by the investor except for the standard “How much dividend will the unit trust give out?” or “What is the minimum amount to start investing?” 

To fully benefit from your unit trust investments, you must be prepared to ask many questions. The answers you get from these agents can help you determine whether investing in a unit trust is suitable for your investment goals and objectives. It will also prevent you from investing in unit trust products that are not suitable for you but which some agents may be promoting to earn higher commission. 

Here is a list of suggested questions (not exhaustive, of course) that you should ask your agents.  

  • Is this unit trust fund approved by the Securities Commission (SC)? All unit trust products must be approved by the SC. To check on an investment product, call (03) 6204 8000 and ask for the Trust and Investment Management Department or visit SC’s website at www.sc.com.my.  

  • How long has the unit trust company been in business? What is its record or performance in giving the promised returns?  It is important for an investor to check out the background of a unit trust company, including the company that will be managing the funds (if the fund is being managed by external fund managers). Find out their record and the experience of the fund managers. You must take the effort to get to know the people to whom you are entrusting your hard earned money.  

  • Does this fund suit my investment goals and risk profiles?  You must first be sure of what your investment goals or objectives are and how much investment risks you can tolerate (investment risks are essentially situations that may arise which can cause you to suffer losses).  

    Nowadays, there are many categories and types of funds in the market, each with its own benefits and risks (the higher the returns promised, the higher the risks you have to take). Hence it is important for you to understand the funds being offered and for you to choose a fund or funds that suit your investment goals and risk tolerance. For instance, if you want a consistent income, you must invest in funds that provide steady consistent returns. You should not be pressured by any agent to invest in a fund that is not suitable for you.  

  • What will happen to the money that I put in a fund? Where will it be invested?  Each unit trust fund has its own investment strategy to meet its investment objective. For example, for an equity fund that targets growth of capital, generally most of the fund’s assets will be invested in equities of companies listed on the stock market that have potential for growth rather than a blue-chip company that offers consistent dividends. As such, the former is riskier.  

    On the other hand, a bond fund will invest most of its funds in bond products, which are low risk. It is, therefore, crucial for an investor to know which investment products/instruments the fund will be investing in, as this will have direct implication on the risk tolerance of the investors. If the fund is investing in high-risk investment products, the unit trust fund itself becomes a high-risk investment. (Check Question 3 too). 

  • How do I know that my fund is doing well? How can I compare it with other funds?  Each fund has its own benchmark (something you can compare its performance with), which is stated in the prospectus. You can compare the rate of return of your fund with these benchmarks.  

    The common benchmark for equity funds is the Kuala Lumpur Composite Index (KLCI) while for bond funds, it is normally the average 12-month fixed deposit rate of banks.  

    Alternatively, you can compare your fund with other funds of similar characteristics. For example, if you have invested in a bond fund, compare its performance with other bond funds.  

    A more complex unit trust fund may have a more complex benchmark. 

  • How will I make money from this fund? (Capital gains? Dividends?) If you invest in unit trusts, your returns could be in the form of capital gains (if the price of units moves favourably) or dividends (if the management company announced any). Get your distribution agent to explain this and read the prospectus.  

  • Do I have to pay any fees or charges?  Every investment has a cost to it and investing in unit trust funds is no exception. Generally, unit trust management companies will impose distribution/transaction charges, such as sales charge and/or redemption charge, when you buy and sell units and imposes management fees and trustee fees annually for the services they provide. Your agent must explain this clearly to you. Read the prospectus for more details on the kind of fees and charges imposed.  

  • If I change my mind after I have invested in a fund, can I sell it back to the company and get a full refund?  Investors are given a “cooling-off period” so they can reconsider if they want to continue investing in the unit trust fund. Subject to conditions, a unit trust investor is entitled to a full refund if he decides not to continue investing in the fund within the “cooling off period.” “Cooling off” is your right! Details on cooling off are highlighted in the prospectus.  

  • How easily can I sell the fund if I need my money right away?  Unit trusts are liquid investments. You may approach your distribution agents and submit a redemption notice to redeem the units and get your money back. It’s important that you know when you will be getting your money back so that you are more prepared in case you need the money urgently. Ask the agent. Details on redemption are also available in the prospectus.  

  • Will I be getting any statement regarding my investment status from the management company?  Your monitoring process will be easier if you receive a statement from the management company regarding your investment status. Find out how frequently you will be getting such a statement. You must monitor your investments.  

  • Where can I get more information about the fund?  Most of the information about a unit trust fund is in its prospectus and annual report. Ask your agent for a copy of the prospectus and read it before investing. 

    l The Securities Industry Development Centre (SIDC), established in July 1994, is the training and education arm of the Securities Commission (SC).   Its mission is to build human capital, guide investors in the capital market and develop investor education programmes to meet the objectives of the Malaysian Capital Market Masterplan and address national development needs. It is recognised as a premier training centre for capital market participants and regional regulators.  

    • Related posts:

    1. Picking the right unit trust fund
    2. Investing in global funds
    3. About capital guaranteed fund
    4. Making the right choice

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