CAPITAL MARKETS: Maximising your unit trust returns

 

Unit trust is an investment vehicle that allows you to invest in a variety of asset classes, offering diversification benefits ■ It’s important to select the best of breed unit trust funds tailored to your asset class and target market to optimise your investment porfolio. when comparing investment options, look at both the investment fee and the overall ROI that the investment offers.

Unit trust is an investment vehicle that allows you to invest in a variety of asset classes, offering diversification benefits. However, to get the most out of them, it’s important to select the best of breed funds, diversify your investments globally and invest through channels with lower management fees.

■ When comparing investment options, look at both the investment management fee and the overall ROI that the investment offers

A COUPLE of weeks ago, I met with a middle-aged couple interested in getting serious about achieving financial freedom.

During our initial consultation, they mentioned that their current investments were in the form of unit trusts recommended by a friend, who is an agent.

However, when I inquired about the specific asset classes their unit trust funds were invested in, they struggled to answer and seemed confused.

This is not an uncommon scenario. Unit trust, one of the most popular investment types in Malaysia, is often misunderstood.

Its easy accessibility and affordability makes it a seemingly a friendlier option for beginners compared to more aggressive investments.

The fact remains, there are still many aspects that are misunderstood about unit trust funds. The ease of access masks the complexities.

So, in this article, we are going to reveal five truths about unit trusts that will help investors make better investment decisions.

Misconception 1: Unit trust is a type of investment

Truth 1: Unit trust is an investment vehicle

A common misconception among new investors is that a unit trust is a standalone investment that focuses on a single asset class, such as property, gold or shares.

In reality, unit trust is an investment vehicle that allows you to invest in a variety of asset classes, offering diversification benefits.

Think of it as a basket containing a mix of investments, like equities, bonds, or even real estate investment trusts. This differs from directly buying individual stocks, where you invest solely in the equity asset class.

For example, if you are looking to invest in Malaysia equities, one option is to directly purchase stocks from several Malaysian companies on the stock market.

Alternatively, you can also invest in a Malaysian equity-type unit trust fund. While the unit trust fund is managed by a fund manager, the asset class you are investing in remains essentially the same or similar.

The specific investment vehicle that you choose is not important. What is more important is the underlying asset classes that you choose to invest into, whether it is using unit trust, exchange-traded funds (ETFS), or other vehicles.

For instance, if you purchase

Malaysian equity unit trusts from three different fund houses, you may think that you are diversifying your investments.

But in reality, these Malaysian equity funds, despite being from different fund houses, still concentrate your exposure to a single market segment.

In essence, you are putting all your eggs into one basket, ultimately investing in a single asset class.

Misconception 2: Equity unit trust funds are as risky as other high-risk investments

Truth 2: Equity unit trust funds are much safer than other high-risk investments

Unit trust funds benefit from a third-party trustee structure, which acts as a safeguard by ensuring the fund’s assets are held on behalf of investors and invested according to the trust deed.

Compared to many other investment schemes, unit trusts are indeed much safer.

Why is that? To illustrate this, let’s take a look at the accompanying diagram.

There are three parties involved in a unit trust fund in Malaysia. The first party is the unit holder, which is you.

Let’s say you invest RM100,000 capital through your fund manager. The money does not actually go into the fund manager’s bank account; it goes into a trustee account, which duty is to hold and protect your capital.

The fund manager is responsible for identifying which equities to allocate the capital to, while the trustee buys and holds the shares according to the fund manager’s instructions.

The beauty of this unit trust model is that it protects your investment.

Even if the fund manager hypothetically goes bankrupt, and has to close its business, your capital is still safe.

This is because the trustee, not the fund management house, holds your money.

Therefore, when you invest in a unit trust fund, you not only getting a return on investment (ROI), but also a return of investment – the return of your capital that you had initially put in.

Misconception 3: Investing in one or two super-performing unit trust funds can grow our serious money effectively

Truth 3: To grow your wealth effectively, you need to diversify globally

The quest for the “best” unit trust fund is a common one, but is it the right approach?

Many investors believe that investing in a single unit trust is effective enough to grow their money in the long run.

The truth is, the way to ensure the growth of your portfolio is by diversifying your asset classes globally.

Take, for example, the impressive performance of the global equities, which have shown an upward trend over the past 30 years.

Several key factors contributed to this phenomenon, including a rising global population and advancements in technology that fuel global demand and productivity.

As many businesses worldwide experience growth and increase their profit, this translates into a rise in global equities.

In contrast, if you were to invest in a share or one fund that focuses on one sector or country, the growth would be unpredictable and less sustainable in the long run.

Therefore, to achieve sustainable growth in your unit trust ROI, ensure that you are diversifying your unit trust funds globally to optimise your growth.

Misconception 4: Unit trust funds are expensive

Truth 4: Unit trust funds can be either expensive or cheap, depending on the channel and market you invest in

One crucial cost to consider for unit trust investors is the sales charge, also known as a front-end fee, applied when purchasing from your chosen fund manager.

When investing in unit trusts through traditional channels, the fees can sometimes go as high as 5%.

It’s important to scrutinise these fees, as high fees can significantly eat into your portfolio’s performance.

For example, suppose your unit trust generates an 8% return in the first year. If the front-end fee charged by your fund house is 5%, your actual return becomes only 3%.

Fortunately, with the online investment platform options and corporate unit trust advisor channel available today, there are many platforms where you can find front-end fees as low as 2% or even lower.

This makes choosing the right channel crucial, as it significantly impacts the fees you pay.

When comparing management fees of your different investments side by side, it is also important to take into account not just the percentage of the fees, but the overall returns of each type of investment and the markets that you invest in.

For example, investors often compare unit trusts to ETFS. ETFS typically boast lower average annual management fees compared to unit trusts.

Due to these lower fees, ETFS might appear to have the potential for higher returns compared to unit trusts.

On the surface, ETF may seem like a better investment option. However, this is not true for all markets.

For example, the investment environment and opportunities in developing markets are vastly different from the developed markets.

In such cases, some unit trust funds managed by experienced professionals have a higher chance of outperforming ETFS despite the higher fund management fees.

Therefore, when comparing investment options, consider the bigger picture.

Look at both the investment management fee and the overall ROI that the investment offers.

Misconception 5: Any unit trust fund salesperson can help you access to the best of breed unit trust funds from the whole market

Truth 5: Only selected qualified advisors can help you access the best of breed unit trust funds from the open market

To optimise your investment portfolio, consider investing in the best of breed unit trust funds tailored to your asset class and target market.

This means that if you are looking to invest in an equity fund in the local market, you should ensure that you pick the best quality fund among all the Malaysian equity funds.

But how do you identify the “best” unit trust fund for your needs? It’s not as straightforward as it seems.

The reality is that many investors rely on bankers or unit trust agents to recommend funds for them to invest in.

However, relying on these recommendations might not be the best approach, as their choices are often limited to the funds offered by their own companies or fund houses.

Therefore, the best recommendation they can make may not be the best fund for you to invest in.

Let’s take the example of several Malaysia equity funds under a single fund house.

The best performing fund within the single fund house, Fund A has achieved an ROI of just under 60% over a five-year period, which is quite impressive.

However, when we broaden our horizons and compare Fund A’s performance to options available in the open market, we are faced with the truth that the fund we initially thought was the best performer (Fund A) ranks lower when compared to other Malaysian equity funds in the open market.

Even more striking, the actual top performer in the open market delivered nearly double the ROI!

In other words, by choosing the seemingly “best” fund within one company only, you could have missed out on potential gains of an additional 60% of ROI. That’s a significant difference!

To ensure that you’re not missing out on potentially better options, consider consulting with independent financial advisors who operate under corporate unit trust advisor company.

They can advise and recommend a wider range of unit trust funds in the open market, not just limited to options within a single fund house.

From the points that I shared above, you’re now equipped with a better understanding of the ins and outs of unit trusts.

Unit trust funds can be a valuable tool to effectively grow your money.

However, to get the most out of them, it’s important to select the best of breed funds, diversify your investments globally and invest through channels with lower management fees.

By following these steps, you can build a sturdy portfolio that will grow steadily in the long run and provide you the financial growth that you seek.

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“Many investors believe that investing in a single unit trust is effective enough to grow their money in the long run. The truth is, the way to ensure the growth of your portfolio is by diversifying your asset classes globally.”

How to protect your sole proprietorship

  

How to protect your sole proprietorship ...

While your business may be thriving under your sole proprietorship, it is important to realise the consequences of having a business ownership tied to you individually, and how it may impact your family in the eventuality of your death. 

THERE are many ways in which middle-income Malaysians make their money; the most common is through a sole proprietorship business, which forms a major part of the business owner’s overall wealth value.

There are many upsides to owning a sole proprietorship – it is fairly easy to set up, the startup costs are low, you have full control over the business as you’re the sole boss and, of course, the main draw is that you keep all the profits you make.

However, a sole proprietorship also has its disadvantages. One of the major disadvantages is that there is no distinction between your private assets and business assets.

As such, there is unlimited liability for debts, which has a potential to eat into your personal wealth should you not take measures to manage your business well.

An aspect commonly overlooked is the need to protect or preserve the business value and continuity should something happen to the owner.

Therefore, while setting up a business may be a positive step to take to help bolster one’s income, there’s also the stark reality every sole proprietor would eventually face – their business will also be terminated should any unforeseen circumstances happen to the owner.

This can be especially daunting for the families of the sole proprietor, who may face immense difficulty in managing their finance and preventing the families’ wealth from being affected after the death.

The case of Leong

Let’s take the example of Leong, a sole proprietor of a successful accounting practice in Puchong with 15 non-professional staff.

Leong’s business was doing so well that even with overhead costs of RM80,000 a month, he could easily draw RM45,000 per month from his practice.

Due to his lucrative business, Leong’s wife stopped working to spend more quality time with their children. One day, Leong met a fatal road accident and passed away. And with his sudden death, came a financial crisis to his family.

Clients who were once close acquaintances of Leong’s practice switched to competitors who offered the same services. Leong’s wife, not a qualified accountant, was unable to pick up her late husband’s business to continue offering these services.

Eventually, the business was forced to wind down as the dwindling income was not able to pay off the company’s overheads.

Since Leong was the sole breadwinner for the family, having no business income meant having no income for the family to survive off. His personal savings was only able to last the family 11 more months without any further influx of income.

As grim as this recollection sounds, it actually happens a lot more often than one might guess.

The question is – how do we avoid such situations for ourselves and our families? What could Leong have done to avoid this financial tragedy befalling his family?

First, let’s see some of the options that are available to Leong’s wife in such a circumstance.

> Liquidation of business by estate administrator.

Unless authorised by the will or court order, the administrator or executor must wind up and liquidate the business as soon as possible. Forced liquidation usually results in severe loss of business value, sometimes ranging as much as 40% to 90%.

> The estate administrator or executor continues the business until it can be sold as going concern.

In this alternative, the sole proprietor’s will gives the power to the administrator or executor to continue the business and exempt him from personal liabilities for the appropriate actions taken during this period.

However, the administrator or executor may still be liable for any losses caused by his or her negligence or imprudence.

Inexperienced administrator

The risk here is that, the administrator or executor may not be experienced or familiar enough to run the business operation.

Secondly, after settling the outstanding estate liabilities, administration expense and taxes, the administrator or executor may not have sufficient working capital to continue the business.

> The heirs inherit the business through a will.

In the sole proprietor’s will, the business can be transferred to the heirs as a gift. However, the heirs may not have sufficient knowledge or ability to run the business profitably.

If they are not successful in running the business, there’s the risk of dissipating their other estate inheritance in order to save the business. As such, the business gift may turn out to be a liability rather than an asset for the heirs.

> Sale of the business through as agreement prior to the death of the sole proprietor.

Before his death, the sole proprietor may offer the sale of his business to his employee or an interested outsider.

Under this alternative, the potential buyer enters into a contractual agreement with the sole proprietor so that the sole proprietor binds his estate to sell and the buyer to buy the business at an agreed price.

Now let’s take a look at some actions that sole proprietors can do while they are living to ensure that their surviving family members are not put into a tough position financially.

> Get a proper business valuation assessment as part of your estate planning.

As sole proprietorship is the trickiest to sell, it is important to have a licensed financial planner to help assess the business value.

He or she would be able to highlight the probable shrinkage in its value under different circumstances, and prevent the sole proprietor from overvaluing their business and thus under preparing the cashflow needed upon death.

Power to executor

> Give the executor of your will the decision-making power to continue or sell the business.

Without this instruction, the executor is bound by law to protect the assets in the estate, and thus may default to winding up the business as soon as possible, which could result in losses.

If the heirs are interested to continue the business, owners of the sole proprietorship may want to instruct the executor to transfer the business to them.

> Seek out a buy-sell agreement with friends or network in the field.

For some professional practices like accountant, doctors, land surveyors, architects, consulting engineers and others, a good practice would be for the sole proprietor to reach out to friends or network in the same field to enter into a buy-sell agreement as an alternative.

Such an agreement will ensure that the surviving professional will purchase over the practices from the deceased’s estate.

An agreement like this would not only help one, but both sole proprietors to ensure the continuity of the business in the event of one of the owner’s demise.

> Identify key employees who can succeed the business.

Depending on the nature of your business, you may want to invest some effort into identifying a potential successor and prepare them to take over the business one day.

Involve any prospective successor in the day-to-day operations to give him or her more experience. You could also consider entering into a buy-sell agreement with the potential successor to buy your business in the event of your death.

> Protect your family with life insurance.

This solution acts as a buffer to provide a safety net to your family. Protecting your family with life insurance while you’re still alive could help bolster losses incurred from a forced wind up of the business.

Forced liquidation

In some cases, the forced liquidation could result in liabilities in excess, of which the life insurance coverage will be able to compensate the business value loss.

In the case that your business does not go through a force winding up, the life insurance claim proceeds will buy your family time to transition through settling your estate, learning the ropes of your business, and/or provide your family accessible working capital during the transition period of settling your estate.

In the case of entering a buy-sell agreement with an interested buyer, he or she can consider purchasing life insurance on the life of the sole proprietor.

This may sound crude and calculated but when the time comes, it can provide additional funds needed for the purchase of the business.

While your business may be thriving under your sole proprietorship, it is important to realise the consequences of having a business ownership tied to you individually, and how it may impact your family in the eventuality of your death.

If you are a sole proprietor, I invite you to evaluate your risks while things are going well with your business. The best way to do this is to employ the expertise of a licensed financial planner.

The licensed financial planner would be able to help identify the pros and cons of each alternative to your business and incorporate your intended wishes into your comprehensive financial planning.

Yap Ming Hui is a licensed financial planner. The views expressed here are the writer’s own. Any reliance you place on the information shared  is therefore strictly at your own risk.

The Star - StarBiz By YAP MING HUI 

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Related 

How to Protect Assets in a Sole Proprietorship

 https://smallbusiness.chron.com/protect-assets-sole-proprietorship-10492.html

 

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