5 Common Misconceptions on Unit Trust Investing

1) The fund annual management fee must be deducted from the indicated ROI to reflect net return

In a fund fact sheet, many investors tend to substract the annual management fee from the indicated returns to get the actual returns. For instance:

Annual Management Fee : 1.5%
Annual return : 10%
Actual Returns : 8.5%

The example above is a mistake.

Firstly the annual management fee will be deducted from the fund’s Net Asset Value daily. Therefore when a fund publishes their fund price at the end of each business day, this is the true value of the fund after deducting all cost incurred for the day including the annual management fee.

Secondly, when calculating a fund’s Annual Return for a particular year, the fund price on 31st December is deducted from the fund price the year before.

2) You must buy in a fund just before its income distribution to gain a quick profit

This is one of the biggest misconception many have towards unit trust. I have seen a bank officer tell this to an aunty!

unit trust distribution
Click to enlarge

Fact is, the fund price will dip slightly just before income distribution, but this is not a “real” price drop due to averse factors. When it distribute “dividends” to unit holders, the fund price will make an adjustment to its fair value. If you are already invested before ex-distribution date, your units will normally be reinvested.

Unit trusts pay out (either cash or re-invested) and their NAV will be adjusted lower EXACTLY to the value paid out +/- the fund’s holdings (stocks/bonds/cash/etc) movement for the day.

Stocks pay out and their MARKET PRICE:
a. Usually drops but to the exact value paid out is highly unlikely
b. May stay
c. May surge

All the above for stocks is due to bid/offer of free market VS…
Unit trusts aint strictly a bid/offer thing – fund house HAS TO BUY BACK at NAV of end day (usually) price.

3) There is only one Fund Management company – P* Mutual

Yes, it is undisputed that P* Mutual (PM) is the largest fund house in Malaysia. But bear in mind that it is not the only one available for investors. Due to aggressive advertising and promotion by PM, many are only exposed to PM.

The same analogy is when we want to buy toothpaste, we say we need to buy Colgate – a brand that is synonymous with toothpaste itself, as opposed to other brand like Darlie, Fresh & White.

There are many other credible fund houses apart from PM such as Eastspring Investment Berhad, CIMB Principal Asset Management, and Kenanga Investors Berhad

You’ll soon realize that other funds apart from PM are really gems which are leaders in their own category – example, Kenanga Growth is one in the Equity Malaysia category. That is a fact. Just read The Edge column on UT returns published which organizes its Lipper Fund Awards every year.

4) If a fund management company goes bust,we will lose our money

A structure of unit trust investment consist of the investor, a fund management company (fund house) and a trustee. The investors, that’s us, place our money into a the unit trust scheme which is safeguarded by the trustee. A fund house manages the funds available from the scheme and in return charges investors an annual management fee.

unit trust trustee

In the event that a fund house or company goes into bankruptcy, the money that investors have placed into the scheme cannot not be legally used to pay off creditors of the fund house that declares bankruptcy

5) Once invested, I don’t need to bother anymore

Not true. While it is relatively passive form of investing, you do need to do switching when situation warrants it – major economic upheaval in certain regions or fund no longer perform. Intra-switch (switch from 1 fund to another within same fund house) is normally free or with negligible cost, while inter-switch (switch from 1 company to another) needs be charge a new sales charge. Which is why for independent advisers, when we manage unit trust portfolio for clients, we use a platform called iFast Capital Malaysia (click here) to do switching for clients free of charge, no limit of switch transactions.

12 thoughts on “5 Common Misconceptions on Unit Trust Investing”

  1. Let’s say the fund’s price is already very high and a major sell-off from unit trust holders of the said fund occurs, will it actually affect the fund’s NAV? Will it cost the fund price to drop? Or is fund price a mirror of its’ holdings only?

  2. Very good article , I did pick a few pointers my agent didn’t tell me. He is a PM agent..somehow i dont agree with most of the comments here..I’m actually quite satisfied with my PM agent, easily accessible and I can ask him any query at any time. So far the profits I have received are also reasonable and been growing . .didn’t feel a need to change company ..but i will definitely look into 3 companies you mentioned.

      1. Patrick,

        You can also explore this website http://www.fundsupermart.com.my. They offer a fair bit of funds from various fund houses. Only thing is they adopt a D-I-Y approach, so you need to do your own research and evaluation before deciding on what funds to invest in. They do offer some advisory services but these people may not be as good and objective as CF. 🙂

  3. PMutual is definately not the best Unit Trust company in Msia nor are their funds the best performing. I have all the Emperical Evidence to prove it. They are probably the ‘loudest’ Mutual Fund Company in Msia – that is true – but by no means are they the best. In fact their returns are pathetic. I used to be an agent with them but stopped long ago cos I don’t want to con my customers just to earn commissions. Would rather make my money the honest way.

  4. CF,

    Very educational and enlightening article. More investors and would-be investors needs to read this article.

    On point 3), I fully agree that because of their aggressive advertising and promotion, they get more publicity. But you also have to realise that because of their size, they can do so. Other fund management companies adopt different approaches and therefore have a different publicity and clientele. I have to agree that Eastspring and Kenanga offer better managed growth and aggressive funds, but unless one uses an FA like yourself, some of these funds are not easily available as not all banks distribute such funds.

    I have learnt not to fully rely on so-called personal consultants in bank branches as they do not really provide competent advice.

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