Unit Trust Basics

General appeal

Diversification of risk

When you invest in unit trust, your money is pooled with those from other investors to create a huge pool of money. This enables your money to be spread across different securities (stocks, bonds, money market instruments) and different sectors (services, plantation, mining, finance, technology etc.). This kind of a diversification adds to the stability of your returns, for example during one period of time equities might underperform but bonds and money market instruments might do well enough to offset the effect of a slump in the equity markets. This “spreading” over many stocks and shares dilutes the risk faced by an individual investor.

Limits of diversification

Funds tend to focus on the segment of the market that fits its’ investment objectives. A fund whose objective is long-term growth in large-company stocks will suffer in a period when large-company growth is depressed. While funds have some freedom to make other types of investments to improve their returns, they may be limited from straying too far from what their objective implies.