Methods of Investing in Unit Trust

Methods of investing in unit trust are as follows:

Lump Sum Purchase
A lump sum purchase is the most common way to invest in a unit trust scheme. A person who has saved enough money to satisfy the minimum amount required can invest that savings in the scheme of his or her choice by completing an application form from the unit trust prospectus. When you make a lump sum purchase, there is no further commitment from you to add to that sum. Your expectation is that over time, you want to see the value of the sum you have put in to grow, earning you capital gains. When it is time that you wish to dispose of the units, the repurchase price of the units should reflect the accumulation and compounding of investment returns since the time of purchase. The compounding of investment returns over time that far exceeds the amount invested makes unit trust scheme particularly attractive to investors.

Reinvestment of Income
Unit trust schemes give out distributions from time to time. Distributions are payment to unitholders. It is recommended that unitholders do not cash the distribution. Rather, they should reinvest the distribution by buying more units of the unit trust scheme. This will allow their investment to increase. Reinvesting distribution is the easiest way a person can increase his investment in unit trust schemes without having to fork out more investment money.

If a unitholder instructs the Unit Trust Management Company to reinvest his distributions, the distribution he receives is used to buy addition units of the Trust, at a selling price quoted usually one month after the ex distribution date.

Regular Saving
Another good way to increase your investment in unit trusts is to make regular contribution to the unit trust scheme. This is achieved through a series of regular sums of investment. A standing order instruction can be given to your bank so that a specific amount is then channel, once every month or so, for investment in unit trust. This is a disciplined way for people to accummulate capital for future need. The sum accummulated at the end of the period may be quite significant compared to the amount regularly contributed. This form of savings is called dollar cost averaging, and is the basis of retirement savings plan such as the Employee Provident Fund.

Investing through regular savings can be made for sums as low as RM100 per month.

Borrowing to Invest in Unit Trust Schemes

Some people invest in unit trust using borrowed money. They expect the rate of return from their unit trust investment to not only cover the borrowing cost, but also give them profit on top of that. I have two things to say about borrowing to invest in unit trust schemes. The first is, don't. The second is, don't forget the first.

There is certainly a big downside to such an activity. The value of the investment could fall, say with a falling share market. While the value of the unit trust may decrease, the amount of loan taken out to buy it remains the same. If this happens, the investor's savings can be wiped out. He will be forced to sell his units at a loss and repay the difference between the proceeds of the disposal of the unit trust and the amount of loan taken by him. Needless to say, this is stress which I don't wish on any investor. So, as a unit trust consultant, I do not encourage investors to invest using borrowed money.

The information provided in this article is related to unit trust, also called mutual fund, in Malaysia.

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