RHB Unit Trust Management Berhad- Benefits

A unit trust fund is a collective form of investment whereby the financial resources of individuals and corporate investors with the same investment objective are pooled together for the purpose of making large-scale investments in a selected portfolio of securities.

As an investor, one can purchase any units which are equal in value in a unit trust fund. He will not only enjoy the earning potential of a large-scale investor but his risk of investment is also spread out over a broad selection of securities.

A unit trust scheme can be illustrated as a tripartite relationship between the Manager, the Trustee and the Unit holders. This tripartite relationship is governed by the Deed.

The Deed spells out in detail the manner in which the scheme is to be administered, the valuation and pricing of units, the keeping of proper accounts and records, the collection and distribution of income, the rights of Unit holders, the duties and responsibilities of the Manager and Trustee with regard to the operations of the scheme, and the protection of Unit holders' interests.

The Manager is obliged under the Deed, Securities Commission Act 1993 and Guidelines on Unit Trust Funds to administer the fund(s)/scheme(s) in an efficient and proper manner that will ensure high standards of integrity and fair dealing in managing the scheme to the exclusive interest of Unit holders and investors, to exercise due care, skill and diligence as well as effectively employ the resources and procedures necessary for the proper performance of the scheme(s).

The Trustee is the appointed trustee for the Unit holders and acts as the custodian for all the assets of the scheme. The Trustee, therefore, must act to ensure that the Manager adheres strictly to the provisions of the Deed, particularly with regard to the creation and cancellation of units, the exercise of investment powers of the fund, collection and distribution of income, proper record keeping of administrative, investment and Unit holders' transactions, and in upholding Unit holders' interest.

The unit trust industry is governed mainly by the SC, which was established under the Securities Commission Act 1993. The SC is empowered to require compliance with all legislations and regulations under its ambit, which are, amongst others, the Securities Industry Act 1983, the Securities Commission Act 1993 and the SC's Guidelines. These securities laws and guidelines have been established to protect the interests of the investing public and to facilitate the orderly development of the unit trust industry.

The following are the benefits of investing in a unit trust fund in comparison to parallel products or methods, like fixed deposits or direct investments in the stock market:-

Cost efficiency
The costs involved with the setting up and maintenance of an investor's portfolio would be reduced through cost sharing with many other investors.

Diversification
An investor can obtain a much wider diversification of risk through a unit trust fund that invests in a large number of securities. This spread is possible because of the combined financial resources of a large pool of investors.

If the investor were to invest directly in the stock market and put all his money into one company, he could lose all of it if the company were to go into liquidation. But with a unit trust fund, the loss would be minimised because the investor's money is pooled together with other investors and invested in a diversified portfolio to spread the risk.

Investment opportunities
An investor will have access to investment opportunities that are not available to individual investors such as highly priced securities of good quality.

Liquidity
An investor can realise all or part of his unit holding during the normal business hours of the management company.

Professional fund management
With a unit trust fund, investments are managed by professional fund managers who have access to specialised research and stock market information and analysis.

Small initial investment
A unit trust fund allows an investor to participate in a professionally managed portfolio of investment without having to expose a large sum of money through direct investment in securities. The investor may enjoy better returns from a portfolio of investment as opposed to the limitation in choices of securities if he was to invest individually.

Just like any other form of investment, unit trust funds also carry some risks. Risk is the term used to describe the extent to which any form of investment may fluctuate in value. One should consider the following when investing in a unit trust fund:-

The performance of a unit trust fund is affected by many variable factors and is not guaranteed. These include overall stock market condition, interest rate fluctuation, stability of local currency, general economic environment and the investment manager's capability. And while a track record may provide some insight on future performance, it is by no means guaranteed. The prices of units may go down as well as up. Likewise, distribution may vary from year to year depending on the performance of the unit trust fund.

Loan financing risk
Investors should assess the inherent risk of investing with borrowed money which should include the following:-

	The ability to service the loan repayments and the effect of increase in interest rates on the loan repayments; and
	The ability to provide additional collateral should unit trust prices fall below a certain level.

Stock market risk
Securities may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of a security may decline due to general market conditions which are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investors' sentiment generally. They may also decline due to factors that affect a particular industry or industries, such as labour shortages or increased production costs and competitive conditions within an industry. Equity securities generally have greater price volatility than fixed income securities.The market price of securities owned by a unit trust fund might go down or up, sometimes rapidly or unpredictably.

Individual stock risk
The performance of each individual stock that a unit trust fund invests is dependent upon the management quality of the particular company and its growth potential. Hence, this would have an impact on the unit trust fund's prices and its dividend income.

Management risk
Poor management of the unit trust fund may jeopardise the investment of each Unit holder. Therefore, it is important to set investment objectives, policies and appropriate strategies before any investment activities can be considered. However, there can be no guarantee that these measures will produce the desired results.

Currency fluctuation risk
As for unit trust funds that invest overseas, fluctuations in the denominated currencies of the foreign shares and fixed income securities/debentures may affect the price of the units.

Country risk
The stock prices may be affected by the political and economic conditions of the country in which the stocks are listed. Careful consideration shall be given to risk factors such as liquidity, political and economic environment before any investments are made in a foreign country.

Liquidity risk
Liquidity risk exists when particular investments are difficult to purchase or sell, possibly preventing a unit trust fund from selling such liquid securities at an advantageous time or price. Unit trust funds with principal investment strategies that involve foreign securities, derivatives or securities with substantial market and/or credit risk tend to have the greater exposure to liquidity risk.

Issuer risk
The value of each individual stock that a unit trust fund invests in may decline for a number of reasons which is directly related to the issuer, such as, the management performance, financial leverage and reduced demand for the issuer's goods or services.

Credit risk
Securities are subject to varying degrees of credit risk, which are often reflected in credit ratings. Municipal bonds are subject to the risk that litigation, legislation or other political events, local business or economic conditions, or the bankruptcy of an issuer could have a significant effect on the issuer's ability to make payments of principal and/or interest. A unit trust fund could lose money if the issuer or guarantor of a fixed income security, or the counterpart to a derivatives contract, repurchase agreement or a loan of portfolio securities, is unable or unwilling to make timely principal and/or interest payments, or to otherwise honour its obligations.

Foreign investment risk
A unit trust fund that invests in foreign securities may experience more rapid and extreme changes in value than a unit trust fund that invests exclusively in securities of Malaysian companies. Nationalisation, expropriation or confiscatory taxation, currency blockage, political changes or diplomatic developments could adversely affect a unit trust fund's investments in a foreign country. In the event of nationalisation, expropriation or other confiscation, a unit trust fund could lose its entire investment in foreign securities. Adverse conditions in a certain region can adversely affect securities of other countries whose economies appear to be unrelated.

Interest rate risk
The yield curve of indicative rates for Shariah compliant debt securities follows the yield curve of the conventional interest rates. Thus, any movement in the conventional interest rates would be reflected in the indicative rates of Shariah compliant debt securities as well.

As interest rates rise, the value of fixed income securities in a unit trust fund's portfolio is likely to decrease. Securities with longer duration tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter duration.

Non-compliance risk
The operations and administration of the funds by the manager or its delegate are governed by the respective funds' deed, all applicable laws and regulations or internal policies and procedures. Risk may arise when compliance with the provisions of the deed or the applicable law is not ensured. The magnitude of such risk and its impact on the funds and/or Unit holders are dependent on the nature and severity of the non-compliance.

Shariah specific risk
The risk that an Islamic fund does not conform to the Principle of Shariah may result in the fund being not Islamic. If this occurs there is a possibility that the unit price of the fund may be adversely affected.

Sector risk
Securities may decline in value due to factors affecting the technology industry or the securities markets generally. The value of a security may decline due to general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic conditions, cyclical or seasonal changes in the industry, technological changes within the industry, changes in the general outlook of the industry, corporate earnings, or adverse investors’ sentiment generally.

Comparison

Comparison between investing in unit trust funds and investment in stocks
An investor who invests in unit trust funds stands to benefit from a diversified portfolio of assets with just a minimal investment amount. In addition, the overall risk is also minimised due to its diversification. This would otherwise not be possible if he invests directly in the stock market. The unit trust investor may also stand to benefit from ringgit cost averaging by investing in a disciplined manner over the long term period and in this way he would not be affected by the market timing factor.

Comparison between investing in unit trusts and investment in bank deposits
An investor who invests in unit trust funds may potentially benefit from a moderately higher rate of return. Although the underlying risks of investing in unit trust funds are higher compared to fixed deposits, the overall risk position is minimised through its diversified portfolio.

	want to assume some form of risk through participation in the stock market and/or fixed income market;
	want an investment which is liquid and easily redeemed;
	want to enjoy a lower transaction cost while investing in the stock market;
	want to have a well diversified investment portfolio which is professionally managed; and
	are prepared to accept the benefits and risks of investing in unit trust fund as stated above.

Investors may incur fees and charges upon the purchase, sale and holding of their investments in the unit trust funds.

A Sales Charge is a front-end fee incurred by an investor when he purchases units of a fund. It is represented by the spread between the NAV and Selling Price of a unit.

A Repurchase Charge is a back-end redemption fee incurred (if charged) whenever a Unit holder redeems his units. It is represented by the spread between the NAV and Repurchase Price of a unit.

Management expenses refer to expenses incurred in administering the unit trust fund. The Manager's and trustee fees, the cost of auditor's fees and other relevant professional fees, distribution of annual reports, tax certificates, reinvestment statements and other notices to registered Unit holders as well as that are directly related and necessary to the business of the fund as set out in the Deed shall be paid out of the fund's assets.

Management Expense Ratio (MER) is the ratio of the sum of the fees and the recovered expenses of the fund to the average value of the fund calculated on a daily basis. The MER indicates the inherent costs of operating a unit trust fund. This includes management fees, trustee fees and expenses incurred for the fund administration services. The higher the ratio, the more expenses are incurred by the fund when it is compared to other trusts within the same category. The lower the MER, the more beneficial it is to the investor.

The following definitions are used to indicate the performance and returns of the unit trust funds:-

Performance Benchmark
Benchmark indices commonly used as a guide when comparing funds performance are typically divided into the following:

Total Return
The percentage change in a fund's price (adjusted for units split and income distribution paid out) for the period.

Average Annual Return
The percentage change in a fund's price (adjusted for splits and distribution paid out) for the period divided by the number of years under review. It comprises both income and capital gains/losses. It is used to compare unit trust returns over periods exceeding one year.

Distribution Yield
Distribution paid to Unit holders out of the trust's income (derived from capital gains, dividend and interest/profit income) measured as a percentage of a fund's Selling Price.