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If you’re new to investing, a unit trust fund is a good way to start. Unit trusts are regulated by the Securities Commission Malaysia and are managed by professional fund managers, who will make investment decisions to help achieve specific goals, such as investing for retirement or growing your capital quickly. The fund managers are monitored by a trustee, who helps to ensure that investment decisions are made in your best interests. 

 

 

If you know your investment goals, it can be easy to start your investment journey through a unit trust fund. Here are some basics you need to know.

What are unit trusts?

Unit trusts are a type of mutual fund that can hold assets, with profits that can be given directly to investors instead of being reinvested. Like other mutual funds, it pools together money from various investors to invest in assets like bonds and equities. 

How do unit trusts work?

Unit trusts solve an important problem for many investors: too many options, too little cash. It can be difficult to diversify your portfolio with several different stocks and assets. For example, the minimum subscription for certain Retail Bond is RM250,000. As an investor, this means you need some serious funds to diversify your investments. 

 

This is where unit trust can help investing beginners to create a more diverse portfolio. In a unit trust, multiple investors contribute their cash, and the combined funds are used to invest in a variety of assets.

 

For a simplified example, imagine you have RM1000 to invest. Two other investors also have RM1000 each to invest, and a stock from Companies A, B and C costs RM1000 each.

 

If you buy stocks individually, you would only be able to invest in one company. But if you invest through a unit trust fund, all three of you would pool your money together. Each of you would be one of the unit trust fund’s unit holders, and the fund would have RM3000 to invest. The fund can invest on your behalf in more than one company, so that all of its investors get to enjoy a portfolio with multiple stocks.

Are unit trusts low-risk?

Just like any other investment, each unit trust fund will carry some level of risk. Although unit trusts make it easy diversify your portfolio and balance out your risks, different funds cater to different risk and reward appetites. High-growth funds will carry a high risk, and it’s important to remember that returns are not guaranteed, even if a fund you choose is considered to be low-risk.

 

You’ll also have to take into account the fees you would have to pay, because these will be charged whether you get good returns or not.

How do dividends work in unit trust funds?

There are some unit trust funds that pay dividends from time to time. The total amount you get from dividends depends on how many units you have purchased from the fund, and the amount that the fund pays per unit.

However, dividends are not returns on your investment.

 

So, what happens when your unit trust pays dividends?

 

Each time your unit trust fund pays out your dividend, the Net Asset Value (NAV) of each of your units will decrease accordingly. 

 

For example: You have 1000 units, and the NAV of your units was RM1 before the dividend payout. 

 

Net Asset Value x No. of units = RM1 x 1000 = RM1000

 

The value of your investment would have been RM1000.

 

If the fund pays a dividend of RM0.05 per unit, you can get a dividend of RM50. But after the dividend payout, your NAV would be adjusted to RM0.95, so the value of your investment would be RM950.

 

Dividend + Value of investment = RM50 + RM950 = RM1000

 

This means that the value of your investment, added together with the dividend you received, would be the same as the value of your investment before you received the dividend.

 

What are dividends for?

Dividends are useful for:

 

  • Getting back part of your investment in cash - This is useful if you need cash that is not tied up in investments. You would not have to sell off your units or pay redemption fees.
  • Reinvesting in more units - This can help you increase your capital gains if the NAV goes up in the future.

How do you grow your wealth with unit trusts?

You may not grow your wealth with dividends, but unit trusts help you grow your wealth through capital gains. Depending on the fund’s performance, the NAV of the units you have purchased can increase or decrease. If their value increases to more than what you paid for them, you will get capital gains. If you choose to redeem your units at this higher value, you will enjoy a profit from your investment.

 

Want to know more about unit trust investments? Read our "why should you make an investment in unit trust" article and start investing in unit trust via CIMB Clicks!

 

 

This article is for informational purposes only and CIMB does not make any representation and warranty as to the accuracy, completeness and fairness of any information contained in this article. As this article is general in nature, it is not intended to address the circumstances of any particular individual or entity. You are advised to consult a financial advisor or investment professional before making any decisions based on the information contained in this article. CIMB assumes no liability for any consequences arising from your reliance on the information presented here.