WHAT IS UNIT TRUST (PART 4)

CHAPTER 1
WHAT IS UNIT TRUST?
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Impact of Expenses on Investors’ Return
Types of Unit Trusts
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Impact of Expenses on Investors’ Return
 
It is common sense that the higher the expenses, the lower the return for investors. However, what most investors don’t realise is the long-term impact of higher cost.Take the example of two funds. Fund A charges a 4% sales charge whereas Fund B has zero sales charge. Thus, the difference in the sales charge, and thus the return, would be 4%.

This may not seem like much. However, what happens if we assess the impact of the 4-percentage point difference over the course of say 30 years?

Table 12 shows the numerical example of the impact on returns assuming an investor invests RM1,000 in Fund A and Fund B over a period of 30 years and both funds deliver 6% returns a year.

 

Table 12: Impact of differences in sales charge in the long run
	Fund A	Fund B	Difference
Sales charge	4.00%	Zero
RM1,000 less sales charge	RM960.00	RM1,000.00
Annual return	6.00%	6.00%
Value of investment in:
Year 1	1,017.60	1,060.00	42.40
Year 2	1,078.66	1,123.60	44.94
Year 3	1,143.38	1,191.02	47.64
…….	…….	…….	…….
Year 30	5,513.75	5,743.49	229.74

 

 

As you can see, the initial RM40 difference due to sales charge has ballooned to RM229.74, or 5.74 times over the course of 30 years.

This is the reason why Inter-Pacific Asset Management unit trust funds do not impose sales charges. Don’t get me wrong. I am not against sales charges as my fundamental belief is that every economic effort taken has to be fairly remunerated. In the event we were to launch funds with sales charges, we will make it such that if investors invest directly with Inter-Pacific Asset Management, the sales charges will be waived.

Types of Unit Trusts

There are many types of unit trusts in the market. However, they generally will fall into the following categories:

[1]. Equity & Fixed Income

Equity funds are unit trusts that invest in listed shares, whereas fixed income funds are funds that invest in bonds and debt securities.

Usually equity funds are categorised as “aggressive”, whereas fixed income funds are categorised as “conservative”.

In between “aggressive” and “conservative” there are balanced funds, which means the funds will have a portion invested in equities and another portion in fixed income.

 

[2]. Equity Big Cap & Small Cap

Another common categorisation is “Big Cap” and “Small Cap”. The general categorisation is that “Big Cap” refers to companies with market capitalisation above RM5 billion whereas “Small Cap” refers to companies with market capitalisation below RM2 billion (though some may put the number at RM750 million). Companies that fall in between the two categories are commonly known as “Mid Cap”.

The general understanding is that “Big Cap” funds are less aggressive in nature in terms of return expectations, whereas “Small Cap” funds are for investors who have higher risk appetites.

[3]. Investment Region

Another method of categorisation is by the geographical region in which the fund will be investing. The fund’s mandate will indicate where the fund will be invested. For example, if the fund’s mandate is “equity Asia ex-Japan”, this means the fund can invest in equities in the Asia region, excluding Japan.

[4]. Thematic Funds

Thematic funds are funds created to invest in certain themes. For instance, funds created solely to invest in the ASEAN region to ride the growth of the region, or funds that are created to invest solely in technology-related companies.

 

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