Tips on how to choose unit trust funds

Personal Investments - By Ooi Kok Hwa

UNIT trust funds offer an attractive alternative to retail investors, especially those looking for the benefit of diversification with a small pool of capital while enjoying the possibility of earning higher returns compared with conventional savings.

However, a lot of people have the misconception that the diversification nature of these funds means that the risk of investing in unit trust is low and they can just close their eyes and simply pick any of the funds that come along.

This misconception has led to many paying high prices in learning that as in any type of investments, investing in unit trust funds requires some basic understanding and research before we commit our hard earned money to it.

In general, we can classify the unit trust funds in the market into two major categories: income funds and growth funds.

·Income funds usually are characterised as providing consistent income to the investors. These funds invest in income-producing stocks or bonds or a combination of both. Bond funds, equity income funds and money market funds are included in this category.

·Growth funds generally are more aggressive than income funds but have the possibility of earning higher returns by focusing on the objective of long-term capital appreciation rather than income producing or short-term gain. Examples of growth funds are small-cap funds, commodity funds, index funds and gold funds.

Before we start evaluating the funds to invest in, there are two main considerations which are our investment objectives and risk tolerance level.

Every investor invests for his own purpose. If you are investing for your retirement and are already close to retirement age, you should look for income funds that are more predictable.

However, if you are still young and want to save for your children’s higher education, which will be 10 or 15 more years, you may want to look for growth funds that generate higher return but with higher level of risk.

Once we are clear on what we are looking for in the investment, we can narrow down our selection to either income or growth category and move to the next step of identifying the most suitable funds within the selected category.

Here are a few key factors to look into when evaluating unit trust funds:

·Investment strategy, policy and holdings: Every fund has its own investment profile. Investors should have a clear understanding of the investment strategy taken in each fund that they are considering to ensure it is consistent with their personal investment objective and risk tolerance level.

Even the funds within the same category may have significant differences in risk exposure due to the difference in the investment holdings.

For example, the risk exposure in large-cap growth companies is definitely much lower than for penny stock funds.

·Past performance: Investors may look into the past performance trend of the fund to gauge its future performance.

However, do bear in mind that good past performance may not be repeated in the future and we should not be overly excited to see one year of good results if the fund is only newly established.

A good fund should be the one that has been consistently out-performing its peers, be it during good or bad times.

·Cost: Investors must be aware that when they buy or sell the funds, there are fees and expenses embedded in every transaction.

For example, the expense ratio of a small fund tends to be higher than a large fund while a regional or global fund usually will carry higher costs compared with a domestic fund.

·Fund management: The fund management is very important to ensure continuity and consistent performance.

If a fund changes management too frequently, it will be very difficult for us to gauge the performance of the fund as different managers will have different styles which may affect the performance of the fund.

For example, if the manager tends to have higher portfolio turnover, then the expense ratio of the fund may increase even though the nature of the fund holdings remains the same.

By having good understanding of the above factors, we may be able to make meaningful comparisons among funds that we are interested in to identify the ones that suit us most.

Source: the Star online

How to invest in gold

HISTORICALLY, gold is perceived to be a safe haven during uncertainties and economic crises as it is considered more stable than other asset classes. It is generally an effective hedge against inflation and fluctuations in the US dollars.

Gold is an investment tool for preservation of wealth and a store of value in times of market volatility. It is an asset diversifier that could lower the overall risk in an investment portfolio.

In the previous article, we discussed the benefits of investing in precious metals and particularly gold. This article will focus on different ways to invest in gold.

Gold and gold-related funds

Gold and gold-related funds are unit trust funds that allow individuals, corporations and institutions with common investment objectives to pool their money for investment in gold and other precious metals. Professional fund managers then use the pooled money to acquire assets which will help meet those objectives.

Generally, a gold fund invests in gold mining equities and/or gold bullion accounts, while a gold-related fund invests in gold and other precious metals including platinum, silver, rhodium and palladium.

"By investing in such funds, investors benefit from diversification in their investments as fund managers buy stocks in more than one gold mining company or more than one type of precious metal," said Datin Maznah Mahbob, chief executive officer, Funds Management Division of AmInvestment Bank Group.

The funds also provide investment opportunities that allow investors to benefit from the investment expertise of fund managers who manage the funds.

In Malaysia, the only gold fund is opened to high-net-worth individuals with the minimum investment set at US$150,000 (RM513,000). For gold-related funds, investors can invest as little as RM1,000 to enjoy diversification in their investments and take advantage of professional fund management.

Gold exchange traded fund

An ETF is a unit trust, listed and traded on a stock exchange. It is an open-ended fund that tracks or follows the performance of a benchmark index.

An index is made up by a basket of securities and usually reflects the movement of an entire market. This gives ETF investors the opportunity to invest in a pre-packaged basket of securities of an index rather than just an individual security.

"Gold ETFs allow investors to buy and sell gold ETF units just like how they trade stocks on a stock exchange. Generally, gold ETFs track gold indexes or the price of gold. The ETFs invest in gold mining stocks to track the gold index," she added.

Gold ETFs, which track the price performance of the gold bullion, enable investors to participate in the gold market without taking physical delivery of gold. This is because it is 100 per cent backed by physical gold held mainly in allocated form. Allocated gold refers to the gold kept in a vault under a safekeeping or custody arrangement and the investor has total ownership to it.

The first gold exchange-traded fund Gold Bullion Securities listed on the Australian Stock Exchange since March 2003 is fully backed by gold, which is deposited and insured.

For SPDR Gold Shares listed on the Singapore Stock Exchange, the underlying gold is stored in the form of 400 ounces London Good Delivery bars in a bank vault.

"Gold ETFs are considered a passive investment. This means that upward movement of gold prices or gold indexes will be followed by the appreciation of ETF unit prices," said Maznah.

There is no gold ETF offered in Malaysia yet, but local investors can invest in Singapore-listed SPDR Gold Shares which are available closer to home. They need to have a foreign trading account offered by a local securities firm to trade the ETF. On top of that, their investment is subject to currency risk since the gold price is quoted in US dollars while the ETF is in Singapore dollars.

Physical gold investment

Some investors prefer to invest in physical gold including jewellery, gold bars and coins to have physical possession of the assets. Gold is an asset appreciated for its intrinsic qualities and beauty.

Investors have the option to buy gold bars in a variety of weights and sizes, ranging from one troy ounce to 400 troy ounces from some banks and jewellery shops. For instance, a local gold trading company offers gold bars and coins of 20 grams at RM2,415, 50 grams at RM6,010, 100 grams at RM11,964 and 1 kilogram at RM119,644 as at September 15 2009.

Investors can also invest in bullion coins offered in different weights of 1/20, 1/10, 1/4, 1/2, and one ounce. The actual value of bullion coins is based on the daily gold price and the gold content. They can buy bullion coins including the American Eagle, Australian Kangaroo Nugget and the Canadian Maple Leaf.

"To make direct investment in physical gold, investors need to set aside a bigger sum of investment compared to buying units in gold funds and gold ETFs. It is not as convenient as they have to think about safe storage and insurance for the precious assets," added Maznah.

Mining stocks

Mining stocks or equities are shares of ownership of a precious metals mining company. The stocks entitle the investor to receive profits from the operations of the company, usually by payment of a dividend, and to any voting rights attached to the stocks. Factors affecting the appreciation potential of a gold mining stock include market expectations of the future gold price, the future earnings and growth potential of the company, mining costs, and the likelihood of additional gold discoveries.

In general, prices of gold mining equities are more volatile than gold prices, thus some gold mining company equities decline when gold prices increase. The short-term volatility of the equity prices could be due to some gold mining companies hedging their future output using gold futures contracts. In the long-term, generally prices of gold mining equities could match the longer-term price trends of gold bullion.

"Investors do not enjoy diversification in their investments when they buy stocks of one gold mining company. They need to allocate more money to buy stocks of different companies to diversify their holdings," explained Maznah.

Gold passbook account

Another option is investors can buy gold in 999.9 fineness using a gold passbook account. Whenever they buy and sell gold, the transactions will be recorded in a passbook provided to the account holders. With the account, they can buy and sell gold at daily quoted gold prices for 1 gram in Malaysian ringgit. The account is normally backed by physical gold.

There are banks in Malaysia that require investors to deposit and trade a minimum of 5 gram of gold. The bank allows investors to make withdrawal in either physical gold or cash credited to their deposit accounts. They will incur a conversion charge inclusive of the shipping and insurance for the physical withdrawal.

One of the disadvantages for this type of investment is account holders do not get any interest or dividend for their investment. They generate profits only if they sell the gold at a higher price compared to their initial investment. The banks normally impose a charge of up to 5 per cent based on the gap between the selling and buying prices to cover administrative and storage expenses.

Conclusion

Now that you have understood the different ways of investing in gold, you need to compare them in terms of diversification, affordability and the advantage of professional management. On top of that, you should consider and select the investment options based on your risk tolerance as well as investment goals and objectives.

source: Business Times

How Long Will It Take To Double The Value Of My Investment?

Many of my friends started asking how long will it take to make their money from their investment, or to be exact - how long will it take to double the value of their investments? It is important to have rough idea of what we are going to gain (or lose) at the end of an investment period. This will help us to make better decisions on where to invest our hard-earned money.

First, we must understand that there are 3 most important factors that will affect our investment returns.

• Impact of Inflation

• Result of Compounding Interest

• Impact of Taxation

Having this in mind,theoretically, there is a very simple rule that can be used to answer our question. It is known as 'The Rule of 72'. Basically, 'The Rule of 72' can help us to estimate:

• how long will it take to double the value of their investments at a given rate of return

• the loss in real value of a given amount of funds with a particular inflation rate

Since it can be used to calculate the no. of years whether to double your investment or the loss in real value of your investment, the formula is given as:

72/given rate of inflation or return = No. of years

Example 1:
Mr. A has RM 150,000 and wants to know how long will take to halve its real value with an inflation rate of 3.5% per annum.

72/3.5 = 20.6 years

This simply means that the RM 150,000 will not have the purchasing power it has currently. Even though you have the same amount of money, in 20.6 years, it can only make purchases worth today's RM 75,000.

Example 2:
Mr. B has RM 100,000 and would like to know how long will it take to double his money, given the rate of return as 7.5% per annum.

72/7.5 = 9.6 years

This is quite straightforward, in 9.6 years, your RM 100,000 will become RM 200,000.

Being equipped with this basic info on investment, I hope you guys can look out for investment tools that can cater for your needs. Just one more point to add - usually this calculation is used for in mutual funds. However, you must always remember that the rate of returns are assumptions that is based on past performance that may not hold true for the future.


The safe way to double your money is to fold it over once and put it in your pocket. ~Frank Hubbard

Pointers For Unit Trust Investments

Please understand that Unit Trust (U.T.)/Mutual Funds is for long term investment only. It not for getting rich quick, neither it is for getting huge returns. However, it can be used as a very good tool against inflation.

Below are few pointers that you should keep in mind before making your decision:

• never allow your emotions to control you when making investment, whether the market is doing very well or very badly.
• you should be prepared to wait for AT LEAST 5 years to see your returns from your investments.
• as the market now is quite volatile and many people are losing their jobs, make sure that you have at least 6 months of salary in savings,to prepare for rainy days (just in case..)
• always add in whatever amount you can afford on a regular basis into your investment to get a better average pricing of your units-also known as Dollar Cost Averaging (DCA).
  

Whether you are opting for the high risk or low risk fund depends on the duration you have for investment, objective of your investment, etc. Generally speaking, people who are nearing retirement should go for the lower risk fund as compared to younger investors. But still, this can change as each individual's risk appetite varies.

Good Investments in Times of Uncertainty

Everywhere I turned to the whole of last month there was talk of the Malaysian Government's additional units of Amanah Saham Wawasan and Amanah Saham Malaysia being launched (unit trust).


In these times of uncertain economic conditions, good investments have been a little hard to come by. The Government, in an attempt to raise funds for various projects came up with a variety of financial instruments and in return to its people, a reasonable rate of returns. Anyway, the current FD rate still stands at a measly 2%.Another benefit of this special unit trust schemes are that they are capital protected. So, if you invest 10K now, you will definitely have a minimum of 10K when you decide to withdraw your investments. And in the past few years, the trend shows that they are giving out 7%-8% of interest.


Most of the allocated units were snapped up during the first day of its launch. Luckily or not, since the government has set a quota based on race (yeah, it stinks to read this, I agree!!!) only the allocation for the Chinese were completely sold out. For the Malays and Indians, it took a bit longer to convince them to invest. Maybe the Chinese community has been better exposed to financial education all along, so they quickly grab the opportunities that come their way.

Considering all these factors, who wouldn't want to invest in an attractive investment vehicles such as this?

Which option to take, 11% or 8%?

The most heated argument taking place among working Malaysians today is 'shall we agree to the option given by the government to reduce our contribution to the EPF from 11% of our salary to 8% for two years starting Jan 1, 2009 or not'.

EPF (Employee Provident Fund) is a fund created by the government as a retirement fund once the employees retire. It is made compulsory as for some people, it may be the only source of retirement fund. It is currently fixed at a minimum 11% reduction from the employee's salary and a minimum 12% contribution from the employer.

Lowering the rate of employees’ contribution to the Employees Provident Fund (EPF) temporarily is part of the Government’s bag of tricks to stimulate the economy. The idea is to boost private consumption by putting more money in workers’ pockets.According to Government's estimates, RM4.8bil a year will be freed up for spending in the economy if all EPF contributors opt for the rate cut.

It is indeed a good strategy for the short term and good for the country's economy as a whole. More employees who fall under the lower income bracket welcome this move as they are struggling to make ends meet due to the current hike in essential goods after the petrol price shot up lately to its all time peak suddenly.A little more cash at their disposal would definitely ease their burden.

However, the rest of the group or the 'financially savvy' ones are crying foul over this move.Their reason is that it definitely means lesser retirement funds. Bad move in the long run.

For the past few years EPF has managed to give out dividends at around 5%. If you can really discipline yourself, even if you claim yourself to be in the financially savvy group, this move can be seen as an opportunity. How?

If you are earning RM4000, the reduction of 3% in EPF contribution will amount to RM120. That means an extra RM120 in your pocket. Don't spend it. Instead look for ways where you can save and invest this money so that it can give you a higher dividend than the one given by EPF. I believe an excellent investment instrument for this small amount in monthly basis would be the mutual funds/unit trust where you can do a Dollar Cost Averaging for 2 years with this extra cash. Or you can also pay off any outstanding credit card debts as the interest charged is usually very high.


So, now you have 3 options in front of you:
1. Reduce the deductions and spend the money.
2. Stick to the 11% deductions and leave the money to grow with EPF.
3. Opt for the 8% deductions and invest in places where higher dividends are being paid.

Make the right choice and have a comfortable retirement later!

How Much Can I Save From The Current Reduction In Food Price?

How much do you think you can actually save from your daily food? Would you be surprised if I said that whatever little money that you saved from breakfast and lunch today could actually provide you with a comfortable retirement? Enjoy going places and relaxing in your own home after retirement with sufficient money for your daily needs. Isn't that wonderful?Maybe you can make use of the current situation. Read on.

Restaurant owners have agreed to reduce the price of 'roti canai' and 'teh tarik' by 10 sen and a plate of 'nasi kandar' by 20 sen, or at least that was what reported in The Star Online. (By the way, 'roti canai' is a Malaysian favourite pancake eaten with some curry and 'teh tarik' is actually a special concoction of tea, milk and sugar and stirred in a special way) This generosity arises from the reduction of petrol prices by the government, which business owners had used as an excuse earlier to hike up the price of almost everything under the sun.

For an average person who has been practising eating out for breakfast and lunch, it means a reduction of 30 sen for breakfast (assuming they have only 2 pieces of roti canai and a glass of teh tarik) and 20 sen for lunch, if he has nasi kandar for lunch. In total, savings for a day amounts to 50 sen.

If working days is considered 5 days a week, then in a month he'll be working 20 days. Therefore, using simple maths, 50x 20 = RM100. Not bad. I didn't realise it can reduce our expense by that much.

Some people are still wondering what to do with their money now. RM 100 savings can easily be used in an investment vehicle such as unit trust or mutual funds. They should make use of the opportunities given, especially now, because the market is all low and is good time to invest. Save a minimum of RM1000 for the initial investment and use the RM100 as the automatic deduction to do dollar cost averaging on your investment.

As for me, how much extra can I save in this particular case? The answer is none, because I usually pack my lunch & breakfast from home itself and I've been saving more all the while. Cheaper and healthier at the same time!

How to Measure Returns

Azizi Ali, one of our famous local millionaires not only accumulates wealth for himself, but also help others achieve the same by training and imparting his knowledge. I found this topic quite interesting as I get questions or statements from friends and family members who say that market is down, so don't invest! or I'd want to monitor my fund performances on my own (mutual funds, to be exact) so that I know how much returns I'm making..

Special Report: How to Measure Returns
by Azizi Ali

"I made fifty thousand in the stock market in 99!" an acquaintance proudly declare. In fact, it was so loud, he was practically screaming in your ear. Which kind of make you feel inadequate because you only made ten grand. So you quickly change the conversation subject to the mating rituals of extinct Sagittarian Mongolian bisons.

But hold on a second. Though it's true that you made less money than him, it does not necessarily mean that he is one up on you. Because we are only talking of straight figures so far. And that is not how return on investment are calculated.

The correct way of measuring returns is in two ways: in percentage form and on an annual basis.

Return must be expressed on a percentage term

Return expressed in straight ringgit/dollar/yen has little meaning. This is because straight ringgit amount do not reveal the amount of money that had to be invested in order to earn that return.

For example, is RM10,000 a good return? The answer is that it depends on the amount invested. If RM50,000 was invested, then RM10,000 would be an excellent return as it is a 20% return. However, if the original investment was RM500,000, then the return is a measly 2%. If his layout was five million instead, then he would have cried as his return is...0.2%! Pass the tissue paper, please.

Return must be expressed on an annual basis

But the job doesn't end there. Even after expressing the return in percentages, it must also be expressed on an annual basis. This is the universally accepted way of stating a percentage return.

Following the earlier example; if the RM10,000 return from the RM50,000 was realized after just 6 months, then the annual return is 44% (The return is 44% instead of 40% due to the compound effect). And even if the investment was cashed out after that six months, we would still consider the return as 44%.
If on the other hand, the RM10,000 was realized at the end of two years, then the return is only 9.54%. (Again, the 9.54% return instead of 10% is due to the compounding factor).

So now you know that the return of x % in y number of years - often quoted by fund managers - is not the right way of indicating return on investment. A 50% return in five years may look good but that is only 8.44% annual return.

Then we can compare

Once we have the returns expressed in percentage form and on an annual basis, only then we can compare the various returns from different investments. Only then the comparison be fair and sensible. Orange to orange, durian to durian.

Coming back to the beginning example, if the guy made RM50,000 from investing RM500,000, his return on investment is 10%. Not bad. Something to crow about, I suppose.

But since you made the ten grand by investing only RM20,000, your return is a fabulous 50%! Whaddaya know - You are the winner!

Now you can go back talking about sex and dead Sagittarian Mongolian bisons.

What Should You Do With Your Money Now?

The most common questions running on everyone's head now would be:

• where to stash my cash?
• is it a good time to invest now?
• should I sell off my investments (stocks, mutual funds, etc) and keep liquid cash?

So, wanting eagerly to dig out the information from my head for the benefit of mankind (ha ha ha), I started this post. However, as I continued with my research, I found that there were already some very good analysis done on this topic and posted on the net by some very experienced finance guys/gals or just let's call them financial gurus. Cancelling of my earlier idea, I decided to let you all to have a go on their opinion instead.

James B. Stewart has written piece recently on this matter in smartmoney under the title : Crashes, Like Bubbles, Call for a Level Head

I liked what he said: -

"I didn't need to waste much time thinking about what to buy. Everything was beaten down. There didn't seem to be any point in stock-picking. As I've said before, at a time like this what you buy is less important than that you buy something."

"...is the predominant emotion, which is fear in a panic, greed in a bubble. Psychologists tell us fear is a more powerful emotion than greed."

He's also written another excellent article, For Long-Term Investors, Now Is Time to Buy. This simple title by itself should tell us what we should do now in terms of investments.

We can also make use of one of his valuable tips in investment as I found below:

"....I follow a disciplined system of buying on 10% declines in the Nasdaq, and selling at intervals of 25% gains. These are based on historical averages for corrections (an average 20% decline) and bull markets (an average 50% gain.) The goal is simple: Buy lower and sell higher."

The Silicon Valley Blogger in her latest update has poured out her opinion, even though that is not the main topic of the day:

"...that it would be a total waste of a bear market if we ever miss the chance to dollar cost average even just a teensy bit into it. If we’ve got money to spare, it’s going into our core index funds."

For a more comprehensive read, she has also given ideas on Best Places To Put Your Money When The Stock Market Tanks.

Over a cup of tea with a friend, a question popped out. "If the average person is selling, then who’s buying?" As I was searching for an answer, I stumbled upon a very good article by J.D at getrichslowly. I was quite surprised to find the exact words that we used were actually in his article! Maybe then, it is possible that we were not the only ones discussing about this topic now.

At the end of the day, after listening to the experts, you decide yourself what do you want to do with your money. It is your money after all.

What is Dollar Cost Averaging?

Dollar-cost averaging (DCA) is a wealth-building strategy that involves investing a fixed amount of money at regular intervals over a long period. Now, most of the time, we hear this term being associated with mutual fund investment. Is it only good for that?

Dollar-cost averaging is simply an investing method of a fixed dollar amount at pre-determined intervals.It can be used in stocks investments as well as mutual fund investments or just any other kind of investment. Yes, you can apply it on real estate investment too, if you want. However, the problem would be the amount of cash that you would need to apply this strategy. For example, let's just say you bought a property at 200,000. Can you invest the same amount on a regular or monthly basis? That would be ridiculous!

But it would be an excellent strategy to be used on mutual fund investment or in the share market. The amount of money invested at each interval remains the same over time, but the number of shares purchased varies based on the market value of the shares at the time of a purchase. When the markets are up, you buy fewer shares per dollar invested due to the higher cost per share. But frankly speaking if the market is on the uptrend, it would not be advisable to invest, right? However, usually investors in mutual funds are known as passive investors, therefore they just let their investment grow over the years and probably they don't have the time to monitor their investment as well. When the markets are down, the situation is reversed and you purchase a greater of number of shares per dollar invested. It's a strategic way to invest because you buy more shares when the cost is low, so you get an average cost per share over time, meaning you don't have to invest the time and effort to monitor market movements and strategically time your investments.

It enables even low-wage earners and folks with tight budgets to invest a minimum amount that they are comfortable with on a regular basis.It cultivates investors to get into the habit of saving, and these small amounts can really add up over the course of a lifetime thanks to the power of compounding.

Now, the next common question would be - 'Can't we do lump sum investment for mutual funds or in the stock market?'. To learn the pros and cons of each strategy, there's an excellent research done by the Silicon Valley Blogger on thedigiratilife.