BuzzLife

I was surprised to read about Pak Lah telling EPF to impose more stingent terms and condition for salaried men and women to withdraw their EPF funds to invest in unit trust funds. I was even more surprised that Pak Lah announced that 80% of funds withdrawn from EPF for investment in unit trust incurred losses. I have no clue at all how accurate is the statement as reported in the mainstream media. But today, the experts dispute these "facts", calling for further verification of the so-called 80% loss before it causes any losses to this billion dollar industry.

I have always been very interested in the share market and unit trusts industry. Having done a lot of research and study on this subject in the past and an avid reader of business magazine Personal Money and the Edge business newspaper, I couldn’t resist to chip in my two cents (worth?) on the recent outcry of these issues in the blogosphere.

My own experiences
I have been investing in unit trust using my EPF funds and my own savings for a long, long time, with my 2 Js as joint account holders. All I can say is I have been getting reasonably good returns, at least better than EPF dividends (4.75% in 2004, 5% in 2005) or for that matter, better than Fixed Deposit Interest Rate, averagely 3.5%. One may argue that probably timing was right/perfect when I put in my investment. But a professional unit trust agent once told me that there is never a right or wrong time to invest, it is how you implement the best practices to max out your returns and reduce the potential risk. And I did that.

I diversify my investment, 70% in equity funds and 30% in bond and money market funds and spread out among a few companies, Public Mutual, SBB and the Government owned PNB (Amanah Saham Malaysia for non-bumiputra). To date, if I average out the returns I am getting from all these investment, I am getting about an annual returns of 8%.

Why we incur instant losses in unit trust
Buying unit trust is different from buying the shares from BSKL. The moment you buy a unit trust fund, you incurred instantly 6.5% loss (for equity funds) or about 0.25% loss (for bond/money market funds). This is incurred from the differences in the buying and selling prices. These cost are for the so-called management fees for the unit trust companies and fund managers. A lot of first time investors who are ignorant about the mechanism of unit trusts are not well informed by unit trust agents or did not do any homework themselves before they invest. As such, they cry losses when they need the $$ urgently and have to sell their funds immediately.

Unit trust is for mid to long term investment, not for instant gains
There may be a lot of misconception by the general public, thinking that they can speculate in the "unit trust" market and the price is generally cheaper than shares price. Unlike buying shares in BSKL, Unit trust is NOT for instant gain, NOT for price speculation. The fluctuation of the price is afterall very minimal and slow. Unit trust is a long-term investment, minimum 3 to 5 years to see returns. A loss in the first year investment does not necessarily mean that there will be further loss and vice versa.

Another point to consider is if you can’t afford to keep a unit trust fund for a long term (more than 3 years), invest in a lower risk, lower return funds such as bond and other fixed income funds. Always also remember that past performance does not guarantee future performance. A professional and well trained unit trust agent should be able to advise you what to do or not to do when the bull runs or when the bear appears. If he/she can not, then don’t invest with he/she.

Dollar Cost Averaging (DCA)

There is no doubt that as investors, there is a risk when we invest in unit trust. Anyway, there is always a risk in any form of investment that we make, except of course, we put all our cash in the bank and let it inflated over time. As such, dollar cost averaging (DCA) is crucial to minimize our potential risk. Dollar cost averaging is investing a fixed amount over a consistent period of time in the long run. This practice works well during a price down trend. Meaning to say, you are buying funds at a discounted price! Or in another words, for the same amount of money, you are getting more units! Isn’t that great? Mega sales lah!

Fund switching/Diversification

Fund switching needs closely monitoring of the market movement. The best person to advice us would be our unit trust agents because how many of us really have the time to monitor the market. Unfortunately, there are irresponsible agents who forget us once we put our thumb print on the forms and they will only appear in front of us 3 months later to get another thumb print! That is if we are small time investors. And no doubt there are good agents who always keep us informed of the market trends.

I personally have not practised fund switching before. From what I read, it is better to switch to less-risk funds such as bond fund, money market fund, property fund or other fixed income fund which are generally lower risk but lower returns, during economic down trend and to switch to equity fund for higher returns.

For those of you who have no time to monitor the market condition or if getting no advice from the agent, Federation of Malaysian Unit Trust Managers recommends diversifications which means to spread out your investment with different unit trust companies and different kinds of funds, hence can reduce the potential risk.

Role of Unit Trust Agents

I personally feel most people incur losses because they are ignorant of the best practices to maximize the returns and lower their risk. As such, Unit trust agents play an important role to advice their investors and who do not act professionally should be held responsible. As mentioned, it is very important that the unit trust agents act upon the interest of the investors rather than their own interest. Agents should fully explain the risk and advice the best practices of unit trust, then the investors can decide for themselves. Just because of some bad apples, it may spoil the image of the total industry, hence the so-called "don’t invest in unit trust because sure lose one."

For better understanding of Malaysian unit trusts, visit the Federation of Malaysian Unit Trust Managers website. For more basic and simpler explanation of unit trust, click here

My conclusion is, yes, it is sad and undeniable that there are indeed people who very unfortunately lose their hard-earned money in unit trust investment. But still, the 80% of EPF investors incurred loss as reported is unbelievable!

Graphics courtesy of FMUTM