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What
is a unit trust?
Unit
trusts have grown in popularity in recent years. It's not
hard to figure out why. Unit trusts are the small investor's
answer to achieving wide investment diversification without
having to come out with prohibitive sums of money. And the
benefits do not end at that.
But
first, what is a unit trust? A unit trust fund is an investment
scheme that pools money from many investors who share the
same financial objectives. In exchange for the money, the
fund issues units to the investors who are known as unit holders.
Unit holders can sell (known as redeeming) their units back
to the fund, or buy (and sell) further units.
Managing
the fund
Meantime the fund is managed by a group of professional managers
(known as the unit trust company) who will invest the pooled
money in a portfolio of securities such as shares, bonds and
money market instruments or other authorised securities to
achieve the objectives of the fund. Because of the large sums
collected, the fund manager is able to diversify among various
investments in such range and diversity that the risks of
investing are minimised.
Income
earned
The
total assets of the fund determine the value of the fund and
the price paid by unit holders or the amount received when
they redeem their units. The unit trust fund earns income
from its varied investments in the form of dividends, interest
income and capital gains. This income is then distributed
to the unit holders in proportion to the units they hold,
in the form of dividends or bonus units.
Protection
for unit holder
As a unit holder, your protection within a unit trust is ensured
in the way unit trusts are structured. Unit trusts are actually
trusts. The protection is enshrined within the unit trust deed
which spells out the respective duties, responsibilities and
expectations of the three parties in the unit trust who are
namely:
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The
unit holders who provide the funds for investing; |
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The
unit trust company providing investment, administrative
and marketing services; and |
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The
trustee company which holds the assets of the trust on
behalf of the unit holders. |
There
are three sources of information that you must examine when
selecting a fund. These are the fund's prospectus, the trust
deed and the financial statements comprising the annual and
interim reports which are available for inspection, free of
charge, at the premise of the fund manager.
Read
the prospectus
The prospectus is a very important document as it sets out the
fund's goals, investment strategies and policies and the risk-reward
position it takes. It may be hard reading being full of legalese,
but you must go through the fine print to ascertain that your
goals and expectations match that of the fund. The financial
accounts will show if the fund is sticking to its game plan
and how well it is performing within the plan. Hence as an investor,
you should consider the following factors when selecting a fund:
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Investment
objective - it must be clearly stated or it gives leeway
for the fund manager not to carry out your intentions
of choosing the fund. |
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Investment
policies - the types of authorised investment and strategies
should match your own convictions. |
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Size
of fund and growth trends. |
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Any
investment restriction, like minimum investment required. |
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Level
of risks with its investments - unit trusts don't completely
eliminate risks. |
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Types
and amount of fees - understand them so that you will
be left with no surprises. |
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Historical
performance on total returns on an annual basis, NAV (net
asset value which is essentially the worth of each unit),
expense ratios, and particularly the distribution of income
to investors and growth of assets - so that you can gauge
how well the fund has performed over time. |
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Latest
investment portfolio - so that you know the percentage
of holdings in each kind of asset. |
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Information
on Board of Directors, key management team (especially
the fund manager, auditor and trustee. |
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