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| Wealth Accumulation |
| Written by Nor Azmi Omar | ||||||
| Sunday, 01 October 2006 04:27 | ||||||
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Investing covers a wide range of activities; people can invest their money in various types of investment ranging from fixed deposits and stocks (which are fairly liquid assets), to property and gold (which are less liquid). Investing also encompass taking very conservative positions to aggressive speculation. In general, investment involves the commitment of funds to assets that will be held over a long period of time. Investors (as opposed to speculators) would normally have time horizons that extend beyond a period of six months or a year. In making the decision to commit their funds for such a long period of time, they would wish to derive a reasonable return on their investments. The return that they can earn from investing in the various types of assets including stocks, bonds, derivative securities, property and others, is known as the rate of return. This return must compensate investors for-
Why do PEOPLE invest? The simple answer to that is to make more money, that is to take the pool of money that they have, and to make it grow in value. In order to achieve this, investors must have a clear understanding of the investment process, the basics of making investment decisions and also an appreciation for the basic techniques involved in analysing investments. The investment decision-making process involves taking into account the basic nature of investment decisions. How do investors decide whether to invest or not in a particular investment? Shares have produced on average, significantly higher returns over the years compared to fixed deposits or bonds. But, should investors invest all their money in shares in order to realise higher returns? Or should they diversify and invest in other assets such as bonds and derivatives? The answer to this lies in the fact that, in order to realise higher returns, investors must bear higher levels of risk. Therefore, underlying all investment decisions is the tradeoff between risk and return - the higher the risk, the higher the return. As such, in deciding on investments, investors should consider the risk and return involved. TYPE OF INVESTMENT Equities Equities are one of the most popular investing instruments of the capital market. When you buy stocks or ordinary shares, you own part of the company and have the right to vote at general meetings. Each share is a small stake in a company and you can buy small or large number of lots depending on the amount of money you have. As a shareholder, you can benefit from the profits earned by the company in the form of dividends paid to you, and also from the growth in the value of the company. You should be aware that there are risks associated with buying shares. When the company performs poorly, its shares may fall in value and you may not receive any dividend. There are other factors such as the performance of the stock market as a whole and the country's economic situation that may affect the price of your shares. It is also possible that you may lose your entire investment if the company goes out of business. There are also shares that are difficult to sell if the demand for them is lacking. It is therefore important that you select the right companies to invest in. In selecting shares, you should examine factors such as the background of the company and its management, its financial strength, price-earning ratio and dividend yield, its earning growth prospect and competitive edge. A wise investor checks out these factors which may affect the price of a stock before putting in his money. Unit trusts A unit trust fund is an investment scheme that pools money from many investors who share the same financial objectives. Unit trusts have grown in acceptance and popularity in recent years. Forwards, futures and options These are basic derivative instruments which are financial assets whose value is dependent on the value of an underlying asset such as common stocks, bonds, currencies or commodities e.g. crude palm oil, rubber, cocoa and tin. They are often used for risk management or hedging by investors to safeguard their investments in anticipation of future market directions. Warrants and TSR Transferable Subscription Rights (TSRs) or Warrants (as they are now more commonly called) give the holders the right but not the obligation, to subscribe for new ordinary shares at a pre-determined exercise price within a stipulated validity period/time frame. Bonds These are often referred to as fixed interest or fixed income securities. When an investor buys a bond, he is effectively providing a loan to the issuer, whether government or company, in return for regular interest payments, as well as the principal sum at maturity upon a fixed period of time. The Wide World of Unit Trusts - 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: The unit holders who provide the funds for investing; The unit trust company providing investment, administrative and marketing services; and 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. 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:
Types of Unit Trusts Unit trusts are considered good instruments for medium- to long-term financial plans. However, it is important that you choose the appropriate fund depending on your risk profile and investment objectives. Listed here are the types of unit trusts currently available in the market: Income funds: Invest in fixed income securities and huge dividend-yielding shares with the view to pay out most of the returns. Suitable for investors seeking income and some level of growth at low risks. Capital growth funds: Invest primarily in shares with the view to maximise capital growth over the long-term (i.e. through a higher unit price). Appeal to high-risk investors keen on capital accumulation. Aggressive growth funds: Similar to capital growth funds but with investments in aggressive, fast track shares that promise high returns - with higher risk. Generally suitable for high-risk investors. Balanced funds: Have three objectives: income, moderate capital appreciation and capital preservation. Invest across a broad spread of asset categories including shares, fixed income securities and cash. Well-diversified and suitable for investors looking for reasonably safe investments where the risks are lower and which produce average returns. Index funds: Invest in a basket of shares that tracks a selected stock market index. Bond funds: Invest only in fixed income securities such as bonds and short-term money-market instruments. All bond funds are subject to interest rate risk and most to credit or default risk of the issuers. Money market funds: Invest only in short-term money market instruments such as treasury bills, negotiable certificates of deposit and bankers acceptances, with maturity of less than 90 days. Since the funds invest in money market instruments, the returns, while small, are generally more attractive compared to saving deposits. Good for investors looking for liquidity, and perhaps a temporary place to park their funds before they commit to other funds. Islamic funds: Managed according to Syariah principles; invest in shares and fixed income securities which excludes non-halal shares and interest-bearing money market instruments. State funds: Managed by the state development corporations for investors from the respective states. Wise Things to Know about Unit Trusts - Choose the appropriate funds There are different types of funds offered by unit trust companies. The three major categories are equity funds that possibly maximise capital growth; bond funds whose aim is to provide steady income; and balanced funds which are a mixture of the other two, providing both capital growth and income. Since the types, numbers and specialisation of unit trust funds are growing, there are enough funds to cater to different investors. You should choose the funds whose objectives and investment mode best mirror your own investment goals and programme. If you are looking for long-term capital growth, invest in funds which offer growth and not income. Fees and commissions Be aware of all fees and commissions that are charged to you by the fund's manager as these affect your costs, and hence your returns. Are they comparable to what other funds are charging? The fund manager Choose your fund manager. Look at his performance history, in terms of the size of funds he was managing and the returns generated. Go for managers of proven competence and integrity, and once you have chosen, let him - whom you have selected for his talent and who has more resources at his disposal than you might ever have - get on with his job. Monitor performance But this doesn't mean a complete hands-off. You should monitor that the fund keeps to the objectives stated in its prospectus. Benchmark the performance of your fund against an appropriate index; for instance you would want your fund to match or, preferably, out-perform the KLSE Composite Index or for bond funds, to match or out-perform the average return from fixed deposits. Short-term volatility might be acceptable but long-term non-performance may be reasonable grounds for you to reconsider your investments. Evaluate performance High distribution (dividend) payouts are not equivalent to a good fund performance. In fact when distributions are made to unit holders, they decrease the net asset value (NAV) of the fund which will also affect the unit price. You should use the 'total returns' method (which takes into account both distributions, if any, and capital gains/losses as reflected in the price of the units) when evaluating a fund's performance. Deal with registered agents only When approached by an agent, ensure that he/ she is registered with the Federation of Malaysian Unit Trust Managers (FMUTM). Do not rely on oral representations from an agent who generates his own promotional materials that are not issued by the unit trust management company of the fund. Check any statements or certificates received from your funds and keep good records of your investments. Additionally, the following are some of the benefits of investing in unit trust as compared to other traditional financial instruments :
EPF withdrawal scheme It is a portion of your EPF money that the EPF allows you to withdraw for investment in equities, bonds and unit trusts.
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