Why Invest In Unit Trust?

Unit Trust investment offer a wide range of benefits when you compare to other investment alternatives such as direct shares, property, bonds and fixed deposit. The primary benefit is that they allow investors access to the capital markets through a convenient and easy to use investment vehicle, which they may not otherwise be able to access if investing directly themselves. More specifically the benefits include :

Diversification
Professional Investment Management
Liquidity
Flexibility
Ringgit Cost Averaging

Diversification

We all know that the best way to reduce risk is not to put all your eggs in one basket. This is especially true of investing in the sharemarket. If we invest in any one or two counters, a significant downward shift in one of these stocks will have a large impact on your total portfolios. By spreading your investments across a range of companies in different industries the risk of adverse movements on a particular stock hurting your overall portfolio return is minimized. Unit trust portfolios enable you to more easily reduce this stock specific risk by pooling your funds with others and investing them across a range of companies. One must be careful however not to invest too widely as this may actually reduce the potential to outperform the overall investment market. Modern portfolio theory suggests that 20-40 stocks is often enough to minimize portfolio risk in any given sharemarket

Professional Investment Management

Having investment professionals manage money for you, even if you only have a small amount of money to invest is probably the key benefit to investing in unit trusts. Most of us do not have the time to research the companies in which we might invest. As such if we are investing in the share market directly for ourselves we may be making decisions that are not that well informed. Professional unit trust fund manager however, devote all their time to researching and analysing the various investment markets and companies. Furthermore, as they usually have large sums to invest, they will often be granted interview with the senior management of the organisations in which they are looking to invest. This allows them to gather a better understanding of the company before making the decision whether to buy, sell or hold the counter.

Liquidity

When we use cash to make an investment it is important to know that if we need cash, we can easily sell the investment without having an impact on the current market value of the investment. Unfortunately, this is not the case for all investors. Take for example an investment in a 12-month term deposit. If after 6 months you need to redeem the money to meet an unexpected financial obligation, you may be required to pay penalties to get your money back before the end of the term. Similarly, an investment in property can take many months to sell. What is more, you cannot simply sell part of the property to meet your financial obligations. Most unit trusts however will allow you to redeem your investments on any given day at the prevailing unit price without penalty (except for those with withdrawal fees). In fact the Securities Commission requires that investors must receive their monies within 10 days of making the request, and the value of the redemption will be based on the prevailing unit trust price on the day the request was made.

Flexibility

Unit Trust investments are not simply a means of investing in the capital markets. Unit trusts can be thought of as an investment package with a number of options available. One of the most useful product options is the availability of regular investment plans. Regular investment plans allow the investor to commit to a series of regular investments over a long period of time by investing an initial sum of money, followed by a standing instruction to their banking institution to continue to transfer money at monthly intervals into trust company or a number of post dated cheques. By committing to an ongoing stream of investments you not only benefit from slowly accruing large sums of money with small regular investments, but also benefit from Dollar Cost Averaging.

Ringgit Cost AveragingI

Is an investment technique which helps you smooth the art of your investments over time. By investing a fixed sum on a regular basis you buy more units in the fund when the unit price is low and less when the price is higher. As such the need to be able to time the investment market is reduced.

Another useful product option on unit trusts is distribution reinvestment plans. In order to benefit from compound returns - that is, returns on your returns, you must reinvest your distribution. With direct shares investment this is usually quite difficult as often the option is for you to receive a dividend cheque. This means that to benefit from compounded returns you will have to cash the cheque and then buy more shares with the proceeds. This is not only administratively cumbersome, but for smaller investments it is also often impossible as the dividend is too small to buy any additional lots.

With unit trusts however, you can elect for your distribution to be automatically reinvested the day following the distribution, no matter how small the distribution.