Truth or half-truth?

5 General statements about unit trusts.

Statement 1: “No need to monitor your fund as price changes are small and you are investing for the medium to long term.”

Granted the daily price change of unit trust is very small i.e. one cent or less in a single day, yet when you look at a period of a year, you will find that the price changes can be substantial (as much as 12%). In the example above, the Fund gained 12% of its value in a 9 months, then lost 8.6% in 1 month. If you had monitored your investments you would have seen the changes and could have taken some proactive steps towards course correction and asset rebalancing. By not monitoring your investments, you lose many opportunities to preserve your profits as well as to make new investments when the market is bottoming. Therefore: “Can you leave your investments unmonitored just because the daily change is small?” Truth or half-truth?

Statement 2: “Unit Trust Is Like a Long-Term Fixed Deposit.

This statement assumes that the stock market moves in a straight line and that there are no ups and down swings of the share market. Growth will naturally be compounded over the years. All you need do is to buy and then keep it for the long term Buy, Hold & Wait.

The chart above shows what has happened to an investment made some 10 years ago. Profits made were lost as the stock market went through its’ normal cycles and the investment ended up with a loss of capital after a long term of 10 years! (Black line denotes the capital. Yellow line denotes the actual investment value).

The Blue line denotes the growth path of a fixed deposit return of 5% per annum. Observe how unit trust outperformed the growth of the fixed interest asset but again because there was no managing of the investment such as switching to different asset classes, the overall result is a dismal value of RM96,655 as of 28^th June 2006. Therefore: “Is unit trust like a long term fixed deposit?” Truth or half-truth?

Statement 3: “You will surely profit because Unit Trust always outperform the KLCI in the long term”

                 

The chart illustrates a fund that was invested on the 31^st July 2001 (5 years ago). The blue line is indicates the performance of the KLCI as a benchmark. It is very obvious that Fund ABC did not always outperform the KLCI.

Outperforming the benchmark simply means that relative to the benchmark, the fund did better. Rather than being led by the relative return outlook, an investor should instead look at the absolute return of the fund . Absolute return means the current value versus the original investment capital. Was there a real profit or not. Absolute return is what an investor should be looking for in an investment. Therefore: “Is it true that you are profiting because your fund outperforms the KL Composite Index? Truth or half-truth?

Statement 4: “You will receive“bonus ” and “dividends” over the years”

            Let us take a look at the chart above. When an initial investment was made on 2^nd Jan. 2000, the investor received 82,644.63 units. Over the years, the units steadily increased with “dividends” and “bonus units”. These are both misleading terms and the correct term is "income distribution" and "unit splits". Whilst these distributions helps to increase the number of units for an investor, it nevertheless reduces the net asset value of the units.

At the end of 16^th June 2006 (some five and a half years later), the investment had accumulated close to 144,000 units from an original 82,644 units (nearly 74% increase over the original number of units.). His initial investment was RM100,000 and the value of his investments as at 28^th July 2006 (five and a half years later) was RM100,215 giving a gross increase in value of just over RM215.00 or gross percentage profit of about 0.2%. His annualized growth is only 0.033% per annum. Therefore: “Does a 74% increase in number of units mean a corresponding 74% increase in investment value?” Truth or half-truth?

Statement 5: “A cheap fund has more growth potential than an expensive fund. Therefore, look for a cheap fund to buy.”

Many people are told that in order to profit more, they should shop for a cheap fund. The chart above various growth funds and their performance since Jan 2002 till 28^th July 2006 (about 4 ½ years ago) if you were to look at the prices of the funds you will see that the performance has nothing to do with its’ price being cheap or expensive. It has everything to do with the ability of the fund manager in managing his stocks selection and skills. Therefore: “When shopping for a unit trust investment, look for a cheap fund to buy?" Truth or half-truth?

We hope that you have enjoyed reading this article but more importantly that it has clarified and given you some understanding into why some people have not gained from unit trust investing due to the misinformation of commonly accepted statement about unit trust. The truth shall set you free.

We wish you successful investing.