Unit Trust Learning Goals Understand what is Unit Trust.

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  • 1. Unit Trust
  • 2. Learning Goals
          • Understand what is Unit Trust.
          • Differentiate between type of Unit Trust and type of Unit Trust fund.
  • 3. What is Unit Trust?
    • A pooled investment plan where the capital contributions of investors are combined into a legally formed trust fund
    • Then invested by professional fund managers, acting on behalf of the investors, in a portfolio of marketable securities
    • “ Trustee” is appointed to safeguard the rights and interests of the investors
    • Investors receive “Units” (shares) in proportion to the amount of money they have contributed to the fund
    • Income derived from dividends, interests and capital gains are divided among the unit holders in proportion to their investments.
  • 4.
    • An indirect investment . It is also called investment companies.
    • Unit Trust investment offers a reasonable amount of return with minimal risk . It is done by professional management at minimal cost, minimizing, liquidity, and capital appreciation
    • Investors money will be pooled together to be invested in a single diversified investment portfolio which comprise stocks, bonds and others in accordance with the investment objective
    • One important feature of unit trust is that professional fund managers are employed to manage the funds. They are highly qualified and experienced in investments.
  • 5. Who Are The Unit Trust Investors?
    • Small or retail investors who neither have the time nor the know-how to hold portfolios through direct investments.
    • Many are highly inexperienced; as a result they turn to these unit trusts management companies to act on their behalf.
  • 6. How a Unit Trust Work?
    • Trust deed
      • An agreement that binds 3 parties (namely, Unit Trust Management Company, the trustee and the unit trust fund’s investors – also called as unit holders) to the deed.
      • The trust deed will have to be registered with the Securities Commission. A copy of the trust deed can be bought at the management company.
    • Trustee
      • Can be the Public trustee of Malaysia or any independent trustee of Malaysia or any independent trustee companies.
      • A trustee is generally reputable financial institution appointed by a deed of Trust to look after the interest of the unit holders.
      • An independent Trustee is appointed to ensure compliance of the management company with the requirements of the Trust Deed, Securities Commission’s guidelines on Unit Trust Funds and Securities Commissioner Regulations 1996
      • As the legal owner of the assets of the fund, the trustee is responsible to ensure that the fund manager invests the funds according to the trust deed.
  • 7.
    • Management Company
      • The promoter of the fund to the public and provides investment expertise to manage the fund and has the primary responsibility of investing the funds according to the objectives.
      • The Management Company also acts as the Registrar of the fund maintaining the records of the unit holders
    • Investors or Unit holders  
      • The providers of funds through purchase of unit trusts from the management company would expect to receive benefits from the investment.
      • If it is an Open-end Fund, the investors can buy units at anytime, as long as the fund has not reached its maximum approved size.
      • They can also sell the unit trusts back to the management company,.
    • The Securities and Exchange Commission  
      • Responsible to safe guarding the interests of the investors who make investments in unit trusts.
      • SEC formulates regulations for the operation of unit trusts and has the necessary power to ensure the proper conduct of the business.
      • It also has the power to license or suspend the licenses of Management Company to operate unit trusts.
  • 8. Types of Unit Trust
    • Open-End Fund
      • Investors buy and sell shares directly with the mutual fund company without a secondary market
      • Have an unlimited number of shares
      • Purchase and selling price is determined by the Net Asset Value (NAV) of the fund
      • All purchases and sales are completed at the end of the day after the stock markets have closed
  • 9.
    • Close-end fund
      • Sell only the initial offering
        • Subsequent trades are done in a secondary market, similar to the common stock market
      • Have a limited number of shares
      • Investment advisor doesn’t have to worry about cash inflow or outflows
      • Purchase and selling price is determined by supply and demand
      • Generally sell at premium or discount (usually discount) to NAV
  • 10.
    • How is close-end fund structured
      • Has board of directors elected by the shareholders.
      • The board of directors will appoint the fund manager for research, portfolio management and the administration of the fund.
      • The fund manager will make recommendation for investments.
      • The investment committee will make decisions on investments.
      • The public trustee will be responsible to disburse the fund for investment.
  • 11. Unit Investment Trust
    • Fixed pool of securities, normally bonds
    • Not actively managed; securities in portfolio remain static
    • Have shares that represent a proportionate share of the trust
    • A portfolio of shares is put together by the trust sponsor and these shares are held in safekeeping under conditions set down in a trust agreement.
    • Redeemable trust certificates will be sold to investors at NAV plus a small commission.
  • 12. Real Estate Investment Trusts (REIT)
    • Closed-end investment company that invests in mortgages and various types of real estate investments
    • Provide high dividends along with capital appreciation potential
    • Types of REITs
      • Property/equity REITs invest in shopping centers, hotels, apartments, office buildings and other real estate
      • Mortgage REITs invest in mortgages
      • Hybrid REITS invest in both properties and mortgages
  • 13. Types of Funds
    • Equity Fund
      • Primarily invest in the stock market.
      • High level of risk and are expected to provide a high return in the long term.
      • Growth Funds and Index Funds fall into this category of unit trusts
    • Income funds
      • It produces high level of current income- invest in high-grade shares that pay good dividend.
      • Established companies and generally viewed as low-risk.
      • Invest in fixed income securities.
  • 14.
    • Balanced funds
      • Generates a balanced return of both current income and long-term capital gains
      • Invest in blend of fixed-income securities and common stocks, with 30% to 40% in fixed income
      • 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
      • Less risky investments for relatively conservative investors looking for moderate growth
    • Growth Fund
      • The primary goal is capital gain and long-term growth.
      • Normally offer little dividends or current income. Because of uncertain long-term perspective, it can be quite risky.
  • 15.
    • Aggressive Growth Fund
      • highly speculative mutual fund that seeks large profits from capital gains
      • Invest in small, unseasoned companies with high price/earnings ratios
      • Often look for turnaround situations
      • Prices are often highly volatile
      • High risk investments for very aggressive investors
    • Islamic Fund
      • Fund will invest in shares which complies with syariah Principles.
      • The Syariah Principles distinguishes between ‘halal’ and ‘non halal’ type of business activities.
      • The returns received would depend on whether investment objective is for growth, current income or a combination of growth and current.
  • 16.
    • Bond Funds
      • Invests in various kinds and grades of bonds, with income as primary objective
      • 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
    • Property trust funds  
      • Special type of close-end fund where it invests mainly in real property rather than in shares or bonds. Because of the nature of the investment, the returns are highly speculative.
  • 17. Advantages of Unit Trust
    • Diversification
      • Many investors lack sufficient resources to establish an adequate diversification on their own.
    • Funds with variety of objectives
      • Different types of funds are created for different investment objectives. So investors should have no problem finding funds that meet their objectives in terms of return and risk
    • Record keeping services.
      • The management company maintains and administers the records of shareholder’s activity for a given year. This is a great convenience for the investors.
    • Professional management
      • Fund managers who are knowledgeable about investment and they have good track records of performance, high integrity, etc.
    • High liquidity
      • Unit trust can be bought and sold easily. Thus they do not suffer from liquidity risk.
    • Affordability
      • Only a small amount of money is needed to participate in a portfolio of investment which enjoys the same benefits as in direct investment which requires large amount capital.
  • 18. Disadvantages of Unit Trust
    • Load fee
      • This is sales charge added to the fund’s NAV when unit trust is sold. It is as high as 10%.   
    • High annual expense
      • The operating expenses like accounting, legal, postage, management fees have to be borne by the investors.
    • Transaction costs .
      • Management companies must also pay transaction costs to buy and sell securities even though they trade in large blocks..
  • 19. Does the Price of Unit Trust fluctuate ?
    • Unit prices could rise or fall due to value changes of the underlying securities owned by the Trust Fund. 
    • The value of equity fluctuates due to changes in the share prices in the Malaysian Stock Exchange.
    • The value of fixed income securities will change due to change in interest rates in the market.
    • Returns on Unit Trust can be determined using the below measurement.
    • Holding period = Selling price – Purchased price + dividend
    • Return Purchased price
    • Return of the fund = new NAV – old NAV
    • Based on NAV old NAV
    • Market returns = new KLCI – old KLCI
    • Old KLCI
    • Changes of funds return = Return on NAV
    • Relative to market return market return
  • 20. Determine the Price of Unit Trust
    • Determined by Net Asset Value (NAV) of the funds managing the portfolio excluding any liabilities incurred and the number of units in circulation.
    • NAV represents the underlying value of a unit share of stock in a particular unit trust.
    • NAV is found by taking the total market value of all securities held by the fund, less any liabilities and divided by the number of units on issue.
    • NAV = Value of Assets - liabilities
    • No. of units outstanding