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Unit Trust And Mutual Funds Finance Essay

Unit Trust is a collective investment scheme that pools the savings of a large number of investors. The money collected is invested by the fund manager in different types of stocks, bonds, or other securities in various proportions depending upon the objective of the fund. The income earned through these investments and the capital appreciation realized by the scheme, after deducting the trading costs and expenses of managing and administering the fund are paid out to the unit holders in proportion to the number of units owned by them.

Most of the unit trust funds in Malaysia are open-ended funds (the fund sells as many units as you and other investors want to buy and buys as many units you want to sell). This makes unit trust funds very liquid investments – though the price at which you sell may be less than your purchase price if the value of the fund has dropped.

You can make an initial investment with as little as RM1,000 and buy additional units when you have more money or invest a fixed amount on a regular monthly schedule via a bank account. Thus unit trust is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio.

Each Fund has a defined investment objective and strategy.

Diversification of risk

investor.When you invest in unit trust, your money is pooled with those from other investors to create a huge pool of money. This enables your money to be spread across different securities (stocks, bonds, money market instruments) and different sectors (services, plantation, mining, finance, technology etc.). This kind of a diversification adds to the stability of your returns, for example during one period of time equities might underperform but bonds and money market instruments might do well enough to offset the effect of a slump in the equity markets. This “spreading” over many stocks and shares dilutes the risk faced by an individual

Limits of diversification

Funds tend to focus on the segment of the market that fits its’ investment objectives. A fund whose objective is long-term growth in large-company stocks will suffer in a period when large-company growth is depressed. While funds have some freedom to make other types of investments to improve their returns, they may be limited from straying too far from what their objective implies.

Different categories of funds

Unit trust funds are also known as mutual funds. These funds fall into 5 primary categories:

Equity funds, also called growth funds. They invest primarily in stocks up to 95%. Meant for aggressive-risk investors. Has higher volatility and risk-return rewards.

Income fund, also called bond funds. They invest primarily in corporate or government bonds and debentures up to 90%. Meant for conservative-risk investors. Low volatility. However, if the bonds are forfeited due to non-performance, the fund will also experience loss.

Balance funds invests in BOTH stocks and bonds usually in the ratio of 60% :40%. This type of fund is suitable for moderate-risk investors. Medium volatility is due to lesser exposure to stocks.

Money market funds. They make short-term investments (usually of less than 365 days) and meant for temporary "parking" the liquid funds whilst waiting for opportunities to invest or to sit out a volatile market.

Capital Guaranteed funds are funds that invests primarily in bonds and have a little exposure in stocks in the approximate ratio of 85% : 15%. These funds are usually open to subscription for a limited period of 30 days only. Investors are expected to lock in their investments for a minimum of 3 years to enjoy the capital guarantee feature.

Every fund in each category has a net asset value (NAV) and each NAV differs daily. The price changes once a day, at 5 pm, when the markets close for the day. All transactions for the day are executed based on the NAV. The Managers will SELL the units to you based on the NAV plus a Service Charge of between 3% - 10%. They will BUY your units back from you at the NAV price.

Calculation Net asset value (NAV) and what’s a unit worth?

A fund’s net asset value (NAV) is what the fund is actually worth. It is measured by dividing the total value of the funds by the total number of units in circulation.

NAV = Total Value of Fund ÷  Total Number of Units in Circulation.

A fund's NAV increases when the value of its holdings increases. For example, if its investments are worth RM 100 million today, but were worth RM 95 million a year ago, its NAV will be higher if the number of units has remained constant.

How to Measuring profits and are you making profits?

The most accurate measure of a mutual fund's performance is its gross profit or loss. It is the total redemption value minus the capital invested. It's typically reported as percentage return and is derived by dividing the gross profit by the amount of your initial investment. How can you know whether you have profited or not? It's simple. This is how you calculate. For example: You invested RM12,000 into fund ATC at a unit price of RM0.50 a year ago. This purchase will result in your having 24,000 units of the fund. If the manager's current buy price is RM0.52, your current value will be: 24,000 units x RM0.52 buy price per unit = RM12,480. This means your gross profit is RM480.00.

Your gross profit is then: RM480 / RM12,000 = 4%.

If your investment was made 2 years ago and the gross profit is the same i.e. 4%, then your annualized profit is approximately: 4% / 2 years = 2% per annum.

Gross profit % and Annualized profit (ROI% p.a.)

Gross profit is profits without consideration of the duration of investment. Annualized profit: When the investment duration is for periods longer than a year, the annualized profit is measured by dividing the gross profit with the number of years invested (as in the example above).

Among the key factors that influence gross profit are:-

the direction of the overall market or markets in which the fund is invested,

the performance of the fund's portfolio of investments, and

The fund's fees and expenses.

In unit trust also include several types of fees like:-

Front Load Service Fee.

Management Fees

Trustee Fees

Fund Expenses

Introduction of Cimb Islamic Equity Fund

There are 3 type of CIMB Islamic Dali Equity as our alternative to invest in Islamic Equity such as:-

CIMB Islamic DALI Equity Growth Fund:

Investment objective

The Fund aims to achieve consistent capital growth over the medium to long-term.

Any material changes to the investment objective of the Fund would require Unit holders’ approval.

Benchmark

The benchmark of the Fund the FTSE Bursa Malaysia EMAS Shariah index.

Investment policy and principal investment strategy

The Fund may invest up to 98% of its NAV principally in Shariah-compliant equities aimed to provide growth but may also invest in other Shariah-compliant permissible investment, such as Sukuk. In line with its objective, the investment strategy and policy of the Fund is to rebalance the portfolio to suit market condition in order to reduce short-term volatility and provide consistency in capital growth.

The asset allocation strategy for this Fund is as follows:

Up to 98% of the Fund’s NAV will be invested in Shariah-compliant equity and other Shariah-compliant permissible investments; and

At least 2% of the Fund’s NAV will be invested in Shariah-based liquid assets.

The assets allocation will be reviewed periodically depending on the country’s economic and stock market outlook. In a rising market, the 98% limit may be breached. However, the Manager will seek to adjust this within a time frame approved by the Trustee.

CIMB-P Islamic combines a top-down asset and sector allocation process with a bottom-up stock selection process. The asset allocation decision is made after a review of macroeconomic trends in Malaysia and other global economies. In particular, CIMB-P Islamic analyzes the direction of GDP growth, interest rates, inflation, currencies and government policies. CIM-P Islamic will then assess their impact on corporate earnings and determine if there are any predictable trends. These trends form the basis for sector selection. Stock selection is based on the growth style of the equity investing. As such, the criteria for stock selection would include improving fundamental and growth at reasonable valuations. Stock valuation fundamental considered are earning per share growth rate, return on equity, price earnings ratio and net tangible assets multiples.

As part of its risk management strategy, the Fund is constructed and managed within pre-determined guidelines. CIMB-P Islamic employs an active asset allocation strategy depending upon the equity market expectation. Where appropriate, the Manager will also employ an active trading strategy in managing the Fund.

As this is an equity fund, it has a proportionally higher equity exposure. Thus, the Manager is unable to take equity exposure down substantially even if it feels that the market is close to its peak. The Manager will therefore take a defensive stance and invest in Shariah-compliant stocks that have low correlation to market movement. Notwithstanding the aforesaid, in times of adversity in equity markets and as part of its risk management strategy, CIM-B Islamic may from time reduce its proportion of higher risk assets, such as Shariah-compliant equities and increases its asset allocation to lower risk assets, such as Sukuk and Shariah-based liquid assets, to safeguard the investment portfolio of the Fund provided that such investment are within the investment objective of the Fund. When deemed necessary, the Manager may also utilize islamic derivative instruments, subject to the SC Guidelines, for purposes such as hedging.

CIMB Islamic DALI Equity Fund:

Investment objective

The Fund aims to achieve a consistent capital growth over the medium to long-term.

Any material changes to the investment objective of the Fund would require Unit Holders’ approval.

Benchmark

As this Fund may invest in local and foreign Shariah-compliant equities, the benchmark of the Fund is a composite comprising 70% FTSE Bursa Malaysia EMAS Shariah index +30% Dow jones Islamic Asia Pacific ex Japan.

Investment policy and principal investment strategy

The Fund is an Islamic equity growth fund and is a continuation of CIMB Islamic DALI Equity Growth Fund. It may invest up to 98% of its NAV principally in Shariah-compliant equities aimed to provide growth but may also invest in other Shariah-compliant permissible investments, such as Sukuk. In line with its objective, the investment strategy and policy of the Fund is to rebalance the portfolio to suit market conditions in order to reduce short-term volatility and provide consistency in capital growth.

The asset allocation strategy for this Fund is as follows:

Up to 98% of the Fund’s NAV will be invested in Shariah-compliant equities and other Shariah-compliant permissible investment; and

At least 2% of the Fund’s NAV in Shariah-based liquid asset.

The asset allocation will be reviewed periodically depending on the country’s economic and stock market outlook. In a rising market, the 98% limit may be breached. However, the Manager will seek to adjust this within a time frame approved by the Trustee. CIMB-P Islamic combines a top-down asset and sector allocation process with a bottom-up stock selection process. The asset allocation decision is made after a review of macroeconomic trends in Malaysia and other global economies. In particular, CIMB-P Islamic analyzes the direction of GDP growth, interest rates, inflation, currencies and government policies. CIMB-P Islamic will then assess their impact on corporate earnings and determine if there are any predictable trends. These trends form the basis for sector selection. Stock selection is based on the growth style of equity investing. As such, the criteria for stock selection would include improving fundamentals and growth at reasonable valuations. Stock valuation fundamentals considered are earnings per share growth rate, return on equity, price earnings ratio and net tangible assets multiples.

As part of its risk management strategy, the Fund is constructed and managed within pre-determined guidelines. CIMB-P Islamic employs an active asset allocation strategy depending upon the equity market expectation. Where appropriate, the Manager will also employ an active trading strategy in managing the Fund. As this is an equity fund, it has a proportionally higher equity exposure .Thus, the Manager is unable to take equity exposure down substantially even if it feels that the market is close to its peak. The Manager will therefore take a defensive stance and invest in Shariah-compliant stocks that have low correlation to market movements. Notwithstanding the aforesaid, in times of adversity in equity markets and as part of its risk management strategy,

CIMB-P Islamic may from time to time reduce its proportion of higher risk assets, such as Shariah-compliant equities and increase its asset allocation to lower risk assets, such as Sukuk and Shariah-based liquid assets, to safeguard the investment portfolio of the Fund provided that such investment are within the investment objective of the Fund. When deemed necessary, the Manager may also utilize Islamic derivative instruments, subject to the SC Guidelines, for purposes such as hedging.

The Manager has appointed CIMB-Principal Assets Management (s) Pte Ltd (“CIMB-Principal(s)”) as the Sub-Manager for the foreign investments of the Fund with the approval of the SC and the Trustee. CIMB-Principal (s) will be responsible for investing and managing these foreign investments in accordance with the investment objective and within the investment restrictions. All costs of this appointment will be borne by the Manager to ensure no additional fee is levied on the Unit holder of this Fund.

The Fund may invest in foreign markets where the regulatory authorities are members of the International Organization of Securities Commissions (IOSCO). The Fund’s investment in foreign markets will be subject to the limit set by BNM and any conditions imposed by the SC from time to time. Currently, the Fund’s holding in foreign investments will not exceed 30% of its NAV. The Sub-Manager may invest beyond this limit provided the necessary approvals are obtained from the relevant authorities (where necessary) and any increase will be reflected in a supplementary prospectus (if deemed necessary). Notwithstanding the aforesaid, the Sub-Manager may decide not to invest in foreign securities as may be agreed upon by the Manager from time to time.

CIMB Islamic DALI Equity Theme Fund:

Investment objective

The aims to provide investors with medium to long term capital appreciation through investments in securities of Malaysian companies that will benefit from prevailing investment themes and that conform to Shariah principles.

Through the investment return, we can compare this CIMB Dali Equity Fund with the three types of different equity fund in the different company. In a five year period, we can see the return of each company is different and the return among the four types equity fund is represent by the CIMB Dali Equity Fund is at higher return.

Conclusion

In conclusion, unit trust investors should always focus on achieving their medium to long-term investment goals. The practice of dollar cost averaging and regular portfolio rebalancing are effective tools that help investors remain focused on the long term horizon and prevent them from over-reacting to short-term movements of the stock market.

For investment purposes, investors should avoid unit trusts that are consistently staying in "low return high risk" quadrant. Unit trusts with very inconsistent snail trail plots over time are also undesirable because the dramatic movement indicates very volatile returns, and in the long term, total holding period returns might deviate very much from the targeted rate. Unit trusts located in the "high return low risk" quadrant are preferred and followed by those located in “low return low risk" or "high return high risk" quadrants.

Investors with different investment objectives and risk tolerance level might be interested in investing in funds located in these two regions. Again, the dynamic performance history will save us from the pit-fall, which we might be deceived into believing by the exaggerated "x" period rate of returns as advertised. As a long-term investor, we should select our investment vehicle with great caution and not be misled by the high return figure of any single period. Instead, consistent long term above average returns with low risk is most desirable.

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