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Selecting the right unit trust

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
Tel : 03 - 469 5560 Fax : 03 - 294 5561


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The current low prices of most unit trust funds given the poor performance of the Kuala Lumpur Composite Index (KLCI) have attracted many long-term investors.

With the recent launching of JF Apex Malaysia Growth Trust, there are now a total of 78 unit trust funds in the local market for investors to choose from.

The larger menu of funds makes it problematic for investors to choose their own investments. While experienced investors face lesser problems, "know-nothing" investors face a mammoth task in selecting their first funds.

Basically, investors should be careful when selecting unit trust funds for their investments. There are a few tips that investors should follow when selecting an appropriate unit trust fund. Proper screening process helps you to achieve your investment goals.

Self-examination is important if you want to build a solid long term investment plan. Make sure you know what you want before making any investment plan. For example, you must be clear about your personal investment objectives and risk temperament.

Different individuals have different needs. To illustrate, some may invest for retirement while others for their childrenís education needs. Assume that you are clear on your investment profile, how do you start then?

Firstly, you should assemble a list of funds and study the prospectus of various funds carefully. Identify the stated investment objectives of the funds and see whether they conform with your investment objectives. Review the funds' annual or interim reports. Their actual performance may not conform with their intended objectives.

To illustrate, some growth funds which claim to invest for capital appreciation in their prospectus, deliver more than half of their returns in the form of dividends rather than capital gains. Investors should therefore carefully pick funds that have historically achieved their stated investment objectives.

Note that some types of funds such as the Islamic funds which invest in syariah stocks are not available to everyone.

Some funds focus on pure capital growth while others invest for income growth or a combination of both. If you are a retiree, you are likely to pick an income-oriented fund that invests for stable returns (passive approach).

If you are relatively young and single, you are more willing to take on some market risks. In this case, growth funds will top your funds list (active approach). Conservative investors who prefer a combination of growth and income would prefer balanced funds.

Investors should remember that high returns come with high risks, a fair trade-off. Thus if you are investing in a fund which focus on second board stocks, while may provide greater growth, the risks involved is always higher.

The smaller nature of second board companies generally provide greater volatility as compared to blue chips on the main board.

Study the investment strategy and asset allocation of the funds to support your decision-making. Obviously, you will not prefer a growth fund that invests mainly in fixed income instruments during a raging bull market and distributes more dividends than capital gains. Remember that asset allocation contributes significantly to the overall returns of the investment portfolios.

Secondly, there is no free lunch in the investing world. Investment managers are paid handsomely to look after your investments. Know the overall fee structures - the relevant charges and fees in the buying and selling of units of various funds.

If you are investing in foreign funds for diversification, you will notice that the fee structures could vary significantly from local funds. Remember also that expensive funds do not necessarily provide greater returns and some could even lag behind their cheaper funds.

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