Dispelling Unit Trust Myths

There are several misconceptions that a unit trust investor needs to be aware of. Read on to discover the true story behind seven common myths of unit trust investment.

1. The best time to invest is just before the dividends or bonus distributions are declared.

Not true.If your unit trusts agent advises you to invest in unit trusts funds due to its upcoming bonus or dividends payments and that you will make profit quickly, think again. You need to know what is involved in unit trust bonuses and dividend distributions. Bonuses will increase the number of units of the fund. For example, your investment in a fund cost RM1 per unit and you invested RM1,000 for 1,000 units. The fund then gives a bonus of one unit for every unit you have (a one-for-one bonus). Subsequently, you have 2,000 units. But the additional units do not increase the value of your investment to RM2,000. It will remain at RM1,000 because the additional units actually reduce your unit value from RM1 to RM0.50 (RM1,000 divided by 2,000 units). Similarly if your fund declares a 5% or RM0.05 dividend, you unit value will be reduced from RM1 to RM0.95 after the dividend is distributed. The dividend will not increase your unit value to RM1.05. So, investing prior to dividend or bonus declarations is not a quick way to make profits. Always think long term when investing in unit trust.

2. Always choose funds that give the highest return in the past.

Not true. Past performance is not an indicative of future performance. Investors should not look at past performance records to predict future prospects. Study the fund's investment strategy and asset allocation to support your investment decision. Generally, the asset allocation contributes significantly to the fund's overall returns.

3. All unit trust funds are the same.

Not true.There is a variety of funds out there with different investment objectives. Each has its own investment characteristics and risk elements. Investors MUST read the fund's prospectus to learn about the funds and should consider choosing the funds that match their investment needs and risks profiles. You could end up investing in the wrong fund if you think that all unit trust funds are the same.

4. Dividend is the only return.

Not true.Investors can measure the performance of their investments in unit trusts by various means. This often includes the calculation of capital gains (the difference between the buying and selling price) or the amount of distributions received from a fund. However, the most effective method in calculating performance is by including both. This performance measure is called total returns as it includes all sources of income i.e. dividends and capital gains (or losses).

5. Unit trusts is a savings account and risk-free.

Not true.Investing in a unit trust is not the same as putting your money in a savings account. If you invested RM1,000, you must be prepared to accept that you may end up with less money than you put in. This is because your investment will be exposed to risks and you may incur losses due to the inherent risks. All forms of investments do carry some degree of risk and investors must be prepared to accept such risks.