CHAPTER 8

INVESTMENT IN UNIT TRUST

Chapter Outlines:
• Introduction
• Participants in Unit Trust
• The Management Company
• The Trustee
• The Unit Trust Holder
• Attraction & Drawbacks of Mutual Fund
• Types of Unit Trust
• Types of Mutual Fund

Prepared by: Nur Liyana Mohamed Yousop

INTRODUCTION TO UNIT TRUSTS

A unit trust fund is an investment

scheme which pools money from
Unit trusts offer investors a simpler,
many investors who share the same
more convenient, and less time-
financial objectives. A full-time fund
consuming method of investing in
manager then invests the pooled
securities than trading individually.
money in shares or other authorised
securities on their behalf.

This pool of money is split into a

There are many different types of unit
number of equal parts called units. As
trusts available to suit your individual
investors, they "buy into" the pool by
investment objectives and risk profile.
purchasing these units.
MUTUAL FUND

 An investment vehicle that is made up of a pool of funds collected from many

investors for the purpose of investing in securities such as stocks, bonds,
money market instruments and similar assets.
 Mutual funds are operated by money managers, who invest the fund's capital
and attempt to produce capital gains and income for the fund's investors.
 A mutual fund's portfolio is structured and maintained to match the investment
objectives stated in its prospectus.

The term of mutual funds

sometimes used
interchangeably with unit
trust
INTRODUCTION TO UNIT TRUSTS

• The unit trust invests in a smaller diversified

Money pooled from investor portfolio of securities and does not actively
trade its portfolio while mutual funds offer
very diverse portfolios and actively trade the
securities in the portfolio.
Funds
• Capital gains, interest and dividend payments
from the trust are passed on to shareholders
at regular periods.
Fund Manager Trustee
Invest • A unit investment trust is generally
considered a low-risk, low-return investment.

• Some investors prefer Unit Trusts to mutual

funds because Unit Trusts typically incur
lower annual operating expenses (since they
are not buying and selling shares)
PARTICIPANTS IN UNIT TRUSTS

•E.g. public •E.g. Public

mutual Trustee of
company, Malaysia
under Public
Bank
The
Management The Trustee
Company

The Unit
Trust Holder

•Individual,
Group,
Company
 THE MANAGEMENT COMPANY

E.g. Public Mutual: Primary responsibility: Invest

Handles the marketing and
The company that the funds according to the
administration of the fund.
established the fund. unit trust holders’ objectives.

Selects and supervises the

investments and administers
the fund in accordance with Prepare a prospectus that is Distribute audited annual
terms of the Trust Deed to be filed with the Registrar report to the unit trust-
(agreement between the management of Companies. holder
company and the trustee to establish
a unit trust scheme).
 THE TRUSTEE

Can be a well known bank or insurance company.

In Malaysia – The Public Trustee of Malaysia.

The trustee acts as custodian of assets and its main responsibility

is to look after the interests of the unitholders.

Responsible for the collection and periodical distribution of

income earned from the investment portfolio.

However, trustee is not liable (not responsible) for acts of

defaults by the management company.
 THE UNIT TRUST HOLDER

They are provided with

the convenience as well
as being relieved from
Members of the public, Form of income or
the burdens of
individual or group who return: Dividends and
selecting and handling
invest in the unit trust. Capital gain.
investments and
reinvesting proceeds on
maturity.
PROS & CONS INVESTING IN UNIT
TRUST

Advantages
•High liquidity
•Affordability (anyone can have it)
•Has many choices (equity fund, growth
fund) based on investors’ level of risks
•Lower risk because it is highly diversified
•Easy to reedeem

Disadvantages
•Returns are moderate to low compared to
other instruments
•High fees charge
•Investors have no choice in selecting
securities in the funds
• Long term investment (take longer time to
enjoy the returns)
 ATTRACTIONS OF MUTUAL FUNDS

Portfolio Diversification
Professional Ability to invest small
•Owning numerous management amounts
securities reduces risk

Convenience
Service
•Easy to buy and sell; high
•Automatic reinvestment of liquidity
dividends
•Fund has a recordkeeping
•Withdrawal plans
•Easy to track prices
DRAWBACKS OF MUTUAL FUNDS

Substantial Transaction Costs Lower-than-Market Performance

Consistently beating the

Management fee
market is difficult

Commission fees on load

funds
HOW MUTUAL FUNDS ARE
ORGANIZED

Investment advisor Distributor sells the

Management
buys and sells stocks fund shares
company runs the
or bonds and
funds’ daily •Direct to the public
oversees the
operations •Through brokers
investment portfolio

Transfer agent keeps

track of purchases Custodian physically
and redemption safeguards the
requests from securities
shareholders
 TYPES OF UNIT TRUST

Item OPEN-END FUNDS CLOSED-END FUNDS

Restriction Does not have restrictions on the Is a publicly traded investment
amount of shares the fund will issue, company that raises a fixed amount of
buy back shares when investors wish to capital through an IPO, will not buy back
sell through unit holders
Number of Have an unlimited number of shares Have a limited number of shares
shares
If demand is The fund will continue to issue shares The fund is then structured, listed and
high no matter how many investors there are traded like a stock on a stock exchange

Buy and sell Investors buy and sell shares directly Sell only the initial offering; Subsequent
with the mutual fund company without trades are done in a secondary market,
a secondary market similar to the common stock market

Price Purchase and selling price is Purchase and selling price is

determined by the Net Asset Value determined by supply and demand
(NAV) of the fund
 LOAD AND NO-LOAD FUNDS

Load Fund: a mutual fund that charges a commission when shares are bought

•Typically sold through a broker

No-load Fund: a mutual fund that does not charge a commission when shares
are bought
•Typically sold directly to investor by mutual fund
•Cost savings tend to give investors a head start in achieving superior rates
of return

Low-load Fund: a mutual fund that charges a small commission (2% to 3%) when
shares are bought

Back-end load: a commission charged on the sale of shares in a mutual fund

 OTHER FEES AND COSTS

Management fee: this represents the management company's fee for

administering the fund and is directly charged to the fund.

•This fee is paid by all types of funds (load vs. no-load; open-end vs. closed-end)
•Fee is charged annually on average net assets

Administrative costs: the normal costs of doing business, such as trading expenses

Taxes on mutual funds

•Mutual funds company do not pay taxes if income and capital gains are passed
on to shareholders
•Shareholders are taxed on their share of income and capital gains annually
REAL ESTATE INVESTMENT
TRUSTS (REIT)

Closed-end investment Types of REITs

company that invests in Provide high dividends
mortgages and various along with capital
types of real estate appreciation potential
Property/equity REITs invest
investments in shopping centers, hotels,
apartments, office buildings
and other real estate

Mortgage REITs invest in

mortgages

Hybrid REITS invest in both

properties and mortgages
TYPES OF MUTUAL FUNDS

No Types No Types
1. Growth Fund 7. Bond Funds
2. Aggressive Growth Fund 8. Index Funds
3. Value Fund 9. Sector Funds
4. Equity Income Fund 10. Socially Responsible Funds
5. Balanced Fund 11. Asset Allocation Funds
6. Growth and Income Fund 12. International Funds
TYPES OF MUTUAL FUNDS

(1) Goal Investment Risk

Growth Fund
• Capital Gain • Invest in large, well- • Moderately risk
• Long Term Growth established investments for
companies with more aggressive
above average investors
growth potential
• Hope for little or no
dividend income
TYPES OF MUTUAL FUNDS

Highly speculative mutual fund

(2)

Aggressive
Growth Fund Goal Investment Risk

• Seeks large profits • Invest in small, • High risk

from capital gains unseasoned investments for very
companies with aggressive
high price/earnings investors
ratios
• Often look for
turnaround
situations
• Prices are often
highly volatile
TYPES OF MUTUAL FUNDS

(3)
Goal Investment Risk
Value Fund
• Seeks stocks that • Focus is on intrinsic • Less risky
are undervalued in value of stocks and • Investments for
the market requires extensive relatively
fundamental conservative
analysis investors looking for
• Invest in stocks with moderate growth
low P/E ratios, high
dividend yields and
promising futures
• Looks for
undiscovered
companies with
potential for future
growth
TYPES OF MUTUAL FUNDS

Emphasizes current income and capital preservation

(4)

Equity Goal Investment Risk

Income Fund

• Focus is on high • Invest in high- • Less risky

current income with yielding common investments for
some long-term stocks, convertible relatively
capital appreciation securities or conservative
preferred stocks investors looking for
• Invests in “blue moderate growth
chip” stocks and
other high-grade
securities
• Typically less price
volatility than
overall stock market
TYPES OF MUTUAL FUNDS

(5) Goal Investment Risk

Balance Fund
• Generates a • Invest in blend of • Less risky
balanced return of fixed-income investments for
both current income securities and relatively
and long-term common stocks, conservative
capital gains with 30% to 40% in investors looking for
fixed income moderate growth
• Allocation between
stocks and bonds
typically remains
constant or varies
very little
• Emphasis between
fixed-income and
common stocks can
be shifted as
market conditions
change
TYPES OF MUTUAL FUNDS

(6)
Goal Investment Risk
Growth &
Income Fund
• Seeks both long- • Focus is on long- • Moderate risk
term growth and term capital investments for
current income, appreciation with investors who can
with primary some high income tolerate moderate
emphasis on capital to provide limited price volatility
gains stability
• Invest in blend of
commons stocks
and fixed-income
securities, with up
to 90% in common
stocks
TYPES OF MUTUAL FUNDS

• Bond Funds: invests in various kinds and grades of bonds,

(7)
with income as primary objective
Bond Fund • Advantages of bond funds over individual bonds:
• More liquid
• Offer high diversification
• Bond funds automatically reinvest interest

• Lower risk investments for investors who are looking for

steady income
• Some price volatility occurs with changing
interest rates
TYPES OF MUTUAL FUNDS

• Buys and holds a portfolio of stocks (or bonds) equivalent to

(8)
those in a specific market index
Index Fund • Objective is to match, not beat, the specific index
• Strategy is buy-and-hold, which provides tax advantages
with very little taxable capital gains
• Operating costs are very low due to low turnover in
investment portfolio
TYPES OF MUTUAL FUNDS

(9)
Goal Investment Risk
Sector Fund
• Produce capital • Investments are • Considered
gains restricted to a speculative
particular segment because limited
of the market diversification can
• Investments are increase investment
concentrated in risks
one specific
industry sector
TYPES OF MUTUAL FUNDS

• Socially Responsible Funds: funds that actively and directly

(10)
incorporate ethics and morality into the
Social investment decision
Responsibility • Specific stocks are evaluated on financial criteria and
Fund moral, ethic or environmental tests
• Stocks that do not meet these tests are not considered
for the investment portfolio
• Examples of excluded companies:
• Tobacco or alcohol
• Gambling
• Nuclear energy

• Returns may be reduced due to limited investment

opportunities
TYPES OF MUTUAL FUNDS

• Funds that spread investors’ money across stocks, bonds,

(11)
and money market securities
Asset • Provides built-in asset allocation by professional
Allocation investment manager
Fund • As market conditions change over time, the asset
allocation mix changes as well
• Provides convenience of “one-stop shopping” without
having to own several mutual funds
TYPES OF MUTUAL FUNDS

International Funds: funds that do all or most of their investing

(12) in foreign securities
International
Fund
Goal Investment Risk

• Objective is to • Funds can • Considered fairly

benefit from specialize in high-risk due to
changes in: international stocks, currency exchange
• International bonds or money risks
market conditions market securities
• Valuation of U.S. • Funds can
dollar specialize in growth,
value, aggressive
growth and other
types of stocks
• Funds can
specialize in
specific countries or
regions of the world
SOURCES OF RETURN FROM
MUTUAL FUNDS

Capital gains Change in price @

Dividend income NAV
distributions

•Unrealized
capital gains
(paper profits):
capital gain that
has not been
realized since
fund’s holdings
have not been
sold
NET ASSET VALUE (NAV)

The term is most

commonly used in
relation to open-ended
Net asset value (NAV) is
or mutual funds due to
a mutual fund price per
the fact that shares of
share.
such funds are
redeemed at their net
asset value.
NET ASSET VALUE (NAV)

NAV = Total Value of Fund

OR;
Units in circulation

NAV = Total assets + Other investments – Total Liabilities

Units in circulation
EXAMPLE 1

If the total assets of unit trust fund amounted to RM510 million, the liabilities
amounted to RM380 million, and other investments amounted RM40 million:

i. Calculate the net asset value (NAV) per unit of the unit trust if the number
of units in circulation is 200 million.

ii. If in the next financial year, the assets increased by 10%, the liabilities also
increased by 5%, and no change in other investments and number of units,
determine the new NAV per unit.
 CALCULATING RETURN: HOLDING
PERIOD RETURN

Returns include
distributions of Best for one year
dividends, Return for specific returns since does
distributions of holding period not use present
capital gains, or NAV value
appreciation

HPRunit trust = Income + Capital Gains + (NAV1 –NAV0)

OR;
NAV0

HPRunit trust = (Number of shares at end of period x Ending price) –

(Number of shares at beginning of period x Initial price)

Number of shares at beginning of period x Initial price

EXAMPLE 2

At this time last year, a unit trust fund had an NAV of RM1.32 per unit. Over the
past year, the fund paid dividends of 6 cents per unit and had a capital gains
distribution of 10 cents per unit. What is the holding period return assuming that
the current NAV is RM1.38?