Thursday, February 19, 2009

How to Make Money From Unit Trust?

Sharing a thought...

It strikes me as strange that those who claimed to be"investors" particularly those long term investors are shying away from the current low price equity market. Why "investors" and not investor? Well, to me, a genuine investor is a long term opportunist who takes the view of long term to realise profit from their investment venture. They will continue to invest especially in the current all time low priced equity market as they know that eventually the market will correct itself. This group of opportunist will invest more especially when the equity market is cheap and will reduce their investment when the market is bullish. However, as they are unsure how low or high the market could go, they invest on a regular basis and are very cautious during peak period or rather when "investors" are entering the market at a feverish speed. A smart investor would have slowed their activities when this group of followers / "investors" continue to invest heavily. I believe Warren Buffet belongs to the former group as he has this infamous quote "Be greedy when the market is fearful and fearful when the market is greedy".

Investment is viewed as a medium to long term instrument and never as a short term tool to make money. Those who entered the market with the hope that they would realised profit within a short period of time (less than 3 years) should call themselves as high risk taker/gambler/follower but never as an investor. A gambler is a person who is taking the risks, either a calculative or a blind risk to earn profit within a short period of time. An impatient lot who gets burnt frequently unless lady luck is by his side.

There are several ways money could be made from Unit Trust if the investor is willing to wait for at least 3 years. Is it a long waiting period? Only you would know.

First, if an investor entered the market at 25sen/unit and the market price shot up to 30sen, of course profit has been made and this is called capital appreciation. Please note, we will ignore service charge in the illustration here to ease explanation. Good to get in touch with your consultant if you are unsure however, you will note that nowadays, all transactions are very transparent as detailed description of the costs involved is clearly stated on the transaction slip. The cost price to use as your benchmark is the price per unit plus service charge.

The greater the disparity in the price the greater the profit margin. On the average, most funds / equities have declined between 30 - 50% from their high value of the bull run season of 2007! So, to those who are investing during the current equity sales period, they are actually buying at 30 - 50% discount and if translated loosely, the potential for them to earn is equally the same once the bull starts seeing red again! Therefore, since the current market price is so cheap, the percentage of loss has been gravely (no pun intended) reduce!

Secondly, generally though not compulsory, Unit Trust company declares distributions by the end of a particular fund's financial year end. It has been said that during distribution, the investor is given what actually belongs to them and therefore it makes no difference to them. Or in layman term, the distribution is given from the left pocket to the right pocket. This however is not true. I used to have the same thinking too until I became a part of the consultant team - in other words, I learnt. No doubt the company pays the investors using their existing fund's value but if you are to look closely, what the company did was to LOCK IN the profit for you. What they did was to reduce the price of the fund on the day of the financial year end and convert the "price difference" into units (at no cost) which increased the number of units held by you. The good news is that the distribution payment is dependent on the number of units held by you! Therefore, the greater the balance of units held the greater the payout would be. I need to reiterate that one of the objectives of investing in unit trust is to accummulate units and is NOT dependent on its pricing unlike buying shares. Imagined, if the company does not lock in the profit for us , the price plunged and no extra units in our account?

Thirdly, as the units held increased due to continuous investment or distribution, the average cost per unit of the fund will further reduced. This scenario further translate to greater profit to the inverstor as their cost is reduced. The impact is greater especially during lowly priced fund period as the units purchased would be more compared for the same amount paid during peak period. Please refer to my previous write up on Dollar Cost Average.

Investing through Unit Trust is very easy and affordable. Easy as it is managed by a team of professional and competent Fund Managers and monitored by your Consultant. Affordable as the minimum investment amount for initial investment is only RM1k whereas top up minimum value is only RM100. That is why at times, I called it as a savings tool due to the flexibility it provides to its savers as they could save as and whenever they have the extra cash or afford to do so. No commitment unless the savers have their own long term financial goal that they want to achieve.

Choice of the fund company is also important. Look at the company's background, track record, fund managers, fund's objective, etc. No doubt there are so many funds and companies that offer such services, as an investor it is our responsibility to do some homework ourselves to choose wisely. However, if still undecided, you could choose several funds from several fund companies. Try to diversify the choice of funds to minimise your risks. Am sure, after several years, you would know which fund or fund company that is able to meet your investment objectives.

So, those who belongs to the "investor" category, it is wise to relook at your investment objective and financial goals once again. If gambling is not your cuppa tea, it is good to take a long term view and start planning on investing for long term purpose. As today's price has never been this ridiculously low, plan on investing on a regular and affordable basis and spread it out over a long period of time and wait. Never, I repeat, dump all your money at once into the equity market. Rather,take the gradual and consistent investment approach. Since you are already in the market, there is no point bemoaning the paper loss that you are experiencing now as they are just paper loss. Take a practical approach and look at the abundance of opportunities available for investment for the long period. I am very sure, you will see the profit in the not too long future compared to cashing out now and suffering loss and cursing this wise investment tool which many people are still unsure of. However, do bear in mind, all investments come with risks but the risks is greatly reduced as you take the long term approach. Be a smart investor and just wait.
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