Question before investing in unit trusts
Investing PublicPublished: Aug 26, 2004 8:48 AM | Updated: Jan 29, 2008 10:21 AM
I would like to refer to the recent letters regarding to unit trust fees, fund managers and the performance of unit trust funds compared to the Kuala Lumpur Composite Index.
There are questions as to why we should pay a high starting fee, considering the losses we suffer.
Ng mentioned that his father does not trust other people to manage his own investment. I agree that you might make more money if you invested on your own. The real advantage is that whenever the share price of the company you invested in rises, you can lock in your profit immediately.
Contrarily, in unit trusts, you have to wait until the end of the day before you can really be sure if you have made a profit.
But with a unit trust equity fund you are also most likely find that with the same amount of money, you can invest in at least between 20 to 30 companies with all research on the companies done by the fund managers.
Are the unit trust fees therefore a high price to pay for enjoying these benefits?
But I guess that Ng's father cannot be blamed for saying what he said. There are a lot of half- baked unit trust agents in the market. Their main income depends on the commission they receive for each sale.
As a result, most of the time, there is no in-depth study on the profiles of prospective investors to provide them with the most suitable investment advice. Whether they are from the banks or are independent, a lot of these agents' main concern is sales.
A large segment of our general public still has a lot to learn about unit trust investment. They tend to believe what their bankers say.
Look at the banks' strategy in selling equity funds. The fixed deposit schemes are quoted at 33 percent per annum or higher. Fifty percent goes to a fixed deposit account and the other 50 percent goes to a unit trust equity fund. The fee of 6.5 percent is used to subsidise the FD rate as quoted by the bank.
As an illustration, say you have RM20K.
With RM10K into FD at 33 percent p.a. for one month (bankers only give you this rate for their one- month FD scheme only), your interest earned is RM280.27.
The other 50 percent (RM10K) with an entry fee of 6.5 percent is RM650. The entry fee is used to subsidise the FD interest of 33 percent p.a.
In other words, you are paying the interest yourself. The next time your banker tells or shows you these rates, walk away as fast as possible.
If questioned on entry fees, some bankers, even managers, will not be aware there is an entry fee being paid. Either they are ignorant or they lack knowledge. I always ask this question, 'How is the unit trust company going to pay your commission if there are no entry fees?'
Remember to ask several sources this question and to also ask about the risks ratio and the efficiency of the fund. Look for consistency in the returns before you decide.
There are questions as to why we should pay a high starting fee, considering the losses we suffer.
Ng mentioned that his father does not trust other people to manage his own investment. I agree that you might make more money if you invested on your own. The real advantage is that whenever the share price of the company you invested in rises, you can lock in your profit immediately.
Contrarily, in unit trusts, you have to wait until the end of the day before you can really be sure if you have made a profit.
But with a unit trust equity fund you are also most likely find that with the same amount of money, you can invest in at least between 20 to 30 companies with all research on the companies done by the fund managers.
Are the unit trust fees therefore a high price to pay for enjoying these benefits?
But I guess that Ng's father cannot be blamed for saying what he said. There are a lot of half- baked unit trust agents in the market. Their main income depends on the commission they receive for each sale.
As a result, most of the time, there is no in-depth study on the profiles of prospective investors to provide them with the most suitable investment advice. Whether they are from the banks or are independent, a lot of these agents' main concern is sales.
A large segment of our general public still has a lot to learn about unit trust investment. They tend to believe what their bankers say.
Look at the banks' strategy in selling equity funds. The fixed deposit schemes are quoted at 33 percent per annum or higher. Fifty percent goes to a fixed deposit account and the other 50 percent goes to a unit trust equity fund. The fee of 6.5 percent is used to subsidise the FD rate as quoted by the bank.
As an illustration, say you have RM20K.
With RM10K into FD at 33 percent p.a. for one month (bankers only give you this rate for their one- month FD scheme only), your interest earned is RM280.27.
The other 50 percent (RM10K) with an entry fee of 6.5 percent is RM650. The entry fee is used to subsidise the FD interest of 33 percent p.a.
In other words, you are paying the interest yourself. The next time your banker tells or shows you these rates, walk away as fast as possible.
If questioned on entry fees, some bankers, even managers, will not be aware there is an entry fee being paid. Either they are ignorant or they lack knowledge. I always ask this question, 'How is the unit trust company going to pay your commission if there are no entry fees?'
Remember to ask several sources this question and to also ask about the risks ratio and the efficiency of the fund. Look for consistency in the returns before you decide.
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