Don't Panic in the Midst of a Market Crash!

When the market crashes, what do you do? What can you do? iFAST Research Team offers their insights in these trying times.

Author : iFAST Research Team

New investors often panic during the midst of a market crash. Suddenly you see your holdings fall drastically and you see that the hard earned money you have put into that sure-win investment evaporating. In those circumstances, there is a very strong urge to do something, anything, just so that you do not feel so helpless.

Thus, one of the biggest mistakes investors often make when the market crashes in to be emotionally driven to take wrong actions on their investments. Of course, there are different situations for every market crash. Some could be the start of a longer and overdue decline (remember the bursting of the Nasdaq bubble?), while others are just temporary and stocks would soon bounce back in time. But the key thing to remember is not to let panic take over.
Investors might do 4 possible things when they are faced with news that the market has just crashed. They might:

• sell off their investments,
  
• switch to other investments,
  
• hold on and just watch, or
  
• buy in further!
  

There is no absolutely correct decision, but we would discuss each of these responses to see when it is a good or bad time to perform them.

The first option, which many new investors are guilty of during a market crash, is to sell off everything. "I have lost 30% of my investments in a month! If this keeps up, I would lose all of it in two more month's time!" Scary as this thought is, it is as likely to happen as it is to snow in Malaysia! If you have thought long and hard before you bought your fund, and you have a reasonably diversified portfolio, you would know this cannot possibly happen. Even during some of the worst market crashes, markets never ever lost all their money. For that to happen, every single stock held by the fund manager must simultaneously go bankrupt!

Very often, by the time you read in the newspapers or hear that the market has plunged overnight, the crash has already happened. Only major crashes make the newspapers and headlines. So, by the time you make the decision to sell off everything, the markets are already down on account of whatever bad news resulted in the crash. When you look at the charts of market indices in hindsight, you often ask "if I could have bought into this market at the very bottom, I would have made so much money in 2 years!" However, if you have lived through those times invested in those markets, you would have realized that it is precisely then, when markets hit bottom, that most investors are selling off all their holdings. So, while selling off everything is the most common choice, it is also usually the worst option!

The only time when it might be a good choice to sell off your investments was if you had cleverly invested in a huge bull market and was riding the market all the way to the top! So, once you have crested it, and there is a market crash, it may signal the end of the huge bull run you have just experienced. In which case, getting out would actually be a smart move. However, this is not an easy thing to do as very often, in such circumstances, you would have been sitting on hefty profits and are wondering whether this is just a temporary dip before the market continues upwards again!

The second choice can also be dangerous and that is to switch to other investments. This is because you are effectively selling out from the current market you are invested in and moving to other investments, whether they are bond funds or other safer markets. In such situations, the urge would be strong to move to less risky pastures like bond funds, capital guaranteed funds and money market funds. But as we have stressed earlier, this is similar to selling out everything and holding cash because the underlying push is still to stop losing money based on something that has already happened! So, again, emotions might be causing a bad decision.

The third choice, which we suggest all investors do, at least at first, is to take a deep breath and hold on. Do so for 1 or 2 days. Like we said just now, with a well diversified portfolio, you can wait that one or two days until you sort out what is happening and calm yourself. While there is the strong urge to take action now, there is also a high possibility that you would be acting emotionally if you acted now! So, the best thing is to take one step back, clam yourself down, and think through everything rationally before you do anything at all! In a few days, everything might look overdone! (Market crashes very often are overdone as investors panic and drive markets lower than they should be!).

Note also that being calm and rational does not mean you sit back and start counting all the reason why you should sell off all your holdings! You should be asking questions like

"Why did I buy into this investment, are the reasons and factors still there?"

"Is this a temporary reaction from investors because of one event which would soon blow over?"

"If I did not have any investments, and had just cash instead, would I be looking to buy this investment because it is now cheap or would I be looking in some other place?"

These are the questions you should be asking yourself. What you should not be asking yourself is whether you need the money or how long you can afford to hold out before you must cash in your losses! These questions will only drive you to sell your holdings blindly. Whether or not you can afford the losses and how long you are prepared to hold the investments are questions you should be asking yourself before you buy any investment, not after you have already bought it!

Even if you do come to a decision to sell your holdings after calm and rational thought because good of and valid reasons, waiting can have its benefits. The markets usually calm themselves after a few days and there is a strong possibility or a slight rebound no matter how terrible the crash. As we saw in the month of October, and in November as well, many markets swung wildly, some within a single trading day as investors grappled with bad news from the ongoing US financial crisis. Just as markets could crash 5 to 8% within a day, they would go back up 8 to 10% the following day again.

The last choice, which is buy even more, is a brave one. Oddly enough, it often tends to be the best in hindsight. It is also the most difficult to do because your mind is screaming for you to sell! Of course, this also varies from situation to situation and some crashes have heralded a longer term decline. But generally, in most circumstances, markets are resilient and bounce back again from their crashes. Let's take a look at table 1.

Table 1

	In that year	1 year later	3 years later	5 years later
YTD 2008	-41.7%	?	?	?
1931	-47.1%	-14.8%	17.0%	111.6%
1937	-38.6%	24.5%	0.3%	-7.4%
1974	-29.7%	31.5%	38.7%	57.4%
1930	-28.5%	-47.1%	-35.0%	-12.5%
2002	-23.4%	26.4%	41.9%	66.9%
1941	-17.9%	12.4%	52.8%	76.1%
1973	-17.4%	-29.7%	10.2%	-1.5%
1940	-15.1%	-17.9%	10.3%	64.1%
1932	-14.8%	44.1%	94.1%	52.5%
1957	-14.3%	38.1%	45.3%	57.8%
1966	-13.1%	20.1%	14.6%	27.1%
2001	-13.0%	-23.4%	5.6%	23.5%
1929	-11.9%	-28.5%	-67.7%	-55.7%
1946	-11.9%	0.0%	9.7%	55.4%
1962	-11.8%	18.9%	46.5%	52.9%
1977	-11.5%	1.1%	42.8%	47.9%
1969	-11.4%	0.1%	28.2%	-25.5%
2000	-10.1%	-13.0%	-15.8%	-5.5%
1981	-9.7%	14.8%	36.5%	97.6%
1953	-6.6%	45.0%	88.1%	122.5%
1990	-6.6%	26.3%	41.3%	86.5%
1939	-5.2%	-15.1%	-21.6%	6.6%
1934	-4.7%	41.4%	11.1%	31.2%
1960	-3.0%	23.1%	29.1%	59.1%
1994	-1.5%	34.1%	111.3%	219.9%
1948	-0.7%	10.5%	56.4%	63.2%

Source: Bloomberg, MSCI, all performance figures are in USD.

Table 1 shows all of the single negative years for the S&P 500 index (an index that is often used as a broad indicator of the US stock market) since the year 1929. And we include the Great depression in this analysis as well. In total, there were 26 years which were negative years, some, like in 1931 during the great depression, was were the index was down 47.1%. Since some of these were too mild to be considered a crash, we set a benchmark of down 20%. So, we look only at the years in which the market crashed by at least 20% or more within one single year. (Note that the US market has crashed 41.7% so far this year as at 25th Nov 08). When we look at only the 20% crashes, we note that there are only 5 of them.

For 3 out of 5 of these great crashes, the 1 year period following these crashes would be a positive one. In other words, there was a 60% chance after such a "crash" year that the following year would be a good one. If we extended this period to 3 years after the "crash" year, the percentage went up to 80%. The percentage fell back to 60% for a 5 year period. And we note that this long period covers all sorts of crisis from the great depression, to world war 2, to the 1st and 2nd oil shocks in the seventies. Indeed, during the great depression, in a year when the S&P 500 index crashed 47% in 1931, the index was up 111% five years later.

Thus, as we have shown. Statistically and historically, the decision to buy in more after a particularly terrible year may often, in hindsight be the best, but it is certainly one of the most difficult option to take.

In conclusion, there is a strong urge for investors to panic and do something during a market crash. However, this is almost entirely emotionally driven. So, we advise that investors would often be better served holding on to their investments instead. In the aftermath of the crash, after things have settled down, the situation would then no longer look so dire. Things have crashed so much over the last two months that in many markets, all fundamentals are being ignored now. Stocks trading at a 2 times price to earnings ratio and 0.5 times price to book ratio are still rated a sell. Many Asian markets are trading at below ten times PE ratio and still the panic is present.

As we mentioned before, ask some of those hard questions and don't panic during a market crash! If the factors on why you bought the investment still stands, then all the more reason to hold on to those investments. This discipline and rational thinking will tide you over difficult volatile periods and serve most, in the long run, to make better returns for such investors.

 

Source : http://www.fundsupermart.com.my/main/research/viewHTML.tpl?articleNo=143

Most Outstanding Islamic Fund Manager Award for 2nd consecutive year

Public Bank's wholly-owned subsidiary, Public Mutual won the Most Outstanding Islamic Fund Manager award for second consecutive year at the 5th KLIFF (Kuala Lumpur Islamic Finance Forum) Islamic Finance Awards 2008 ceremony. The award was presented by Y.B Tan Sri Nor Mohamed Yakcop, Minister of Finance II to Public Mutual's Chairman Tan Sri Dato' Sri Dr. Teh Hong Piow during the award presentation ceremony which was held on 18 November 2008 at the Istana Hotel Kuala Lumpur.

The 5th KLIFF Islamic Finance Awards 2008 is organised by The Centre for Research and Training (CERT) together with the host, Halal Industry Development Corporation (HDC), and in collaboration with Dow Jones Islamic Market Indexes (DJIM), the International Institute of Islamic Finance (IIIF) and Messrs Hisham, Sobri & Kadir (HSK).

Tan Sri Teh expressed pride that once again Public Mutual is bestowed this prestigous award. "This award represents the 121st award won by Public Mutual since 1999. Winning this award not only reinforces our position in the Islamic unit trust industry but also affirms our commitment to excellence," he added. Tan Sri Teh dedicated the award to Public Mutual's board of directors, the management, staff, agency force and the investors for their unwavering support and trust over the years.

Public Mutual is a leading player in the private Islamic unit trust fund sector in Malaysia. As at end September 2008, it manages 24 Islamic funds with total Islamic assets under management of RM8.5 billion. This represents 50.7% market share of the private Islamic unit trust industry. The company is also the most awarded Islamic unit trust fund manager in Malaysia, winning a total of 32 Islamic Fund Awards. This includes the "Best Islamic Fund Manager in Asia 2006 & 2007" awarded by Failaka Advisors, Dubai, a recognised leader in the field of Islamic fund research.

Public Mutual is Malaysia's largest private unit trust company with 67 funds under management. It has over 2,000,000 accountholders serviced by over 40,000-strong unit trust consultants. As at end September 2008, the total net asset value of the funds managed by the company was RM24.1 billion.

EPF: Volatile Market Creates Buying Opportunity

KUALA LUMPUR, Nov 20 (Bernama) -- Current market conditions have opened up buying opportunities for long-term investors, said the Employees Provident Fund (EPF) deputy chief executive officer, investments, Johari Abdul Muid.

He said that a bearish market was a boon to long-term investors like the EPF, as it provided an opportunity to pick up good, valued stocks at reduced prices.

He said that Bursa Malaysia is expected to remain volatile in line with global and regional markets as investors continue to take a cautious stance while monitoring developments in the domestic and global economy as well as the financial system.

He said like every other fund, the EPF was also affected due to the downturn in the stock markets but was on track until Sept 30 to basically meet budget expectations, as it had realised a big portion of the target earlier.

"The global financial crisis has led to stock markets across the globe falling dramatically. Bursa Malaysia has also not been spared," he told Bernama in a recent interview.

He said that this factor would naturally have an adverse impact on the funds income and it would be difficult for the 2008 dividend to match that of 2007.

"Furthermore, the recent quarterly announcements by listed companies have reported lower profits which usually translates into lower dividend payouts, or not at all. This will further impact the EPFs investment income for 2008 and 2009," he added.

Johari said that although the fourth quarter did not look that rosy, as the full impact of the global meltdown would be felt, it was still an opportunity to buy.

He explained that the EPF subscribed to prudent management and investment policies to ensure reasonable and sustainable returns.

"The EPF is first and foremost the custodian of retirement savings of close to 12 million members and will therefore be always guided by prudence when making investment decisions.

"It is through this investment approach that we can ensure our members are paid reasonable dividends year-on-year, without risking their savings," he said.

He also said the EPF's commitment is that,the dividend would not fall below 2.5 percent.

"Generating more income has to do with the risk that you are willing to take. As a pension fund, we must ensure that the money is safe. We have to be as efficient as possible in every asset class that we invest," he said.

In terms of asset allocation, he said that 80 percent was parked in fixed income instruments such as Malaysian Government Securities (MGS), and loans and bonds with only 20 percent in domestic equity.

The EPF, he highlighted, is allowed to invest up to nine percent of its total fund size in foreign equity markets which amounts to RM28 billion.

However, it has only invested RM19 billion to date and in the current difficult time, has managed to lock in RM500 million in profits.

"Our risk perspective when investing overseas is not to put all the eggs in one basket," he said.

He said besides in-house fund managers, EPF has also appointed external fund managers to manage its funds.

Source: BERNAMA , 20th November 2008.

Dilemma for EPF Contributors

KUALA LUMPUR: More money to use now means less for one's retirement. This is the dilemma Employees Provident Fund contributors face should they decide to opt to have their monthly contribution reduced from the mandatory 11% to the "voluntary" 8%.

The government's decision to adopt this measure to help Malaysians tide the rise in prices of goods and services and the economic downturn is heartily welcomed by those in the lower income group and struggling to pay bills.

But there are many who prefer to stick to the 11% deduction and tighten their belts momentarily.

This group is also irked by the "burden" of having to fill up an EPF form – those who do not will be deemed to be agreeable to contributing 8% for two years effective Jan 1.

Under the new scheme, a 35-year-old employee with a RM3,000 monthly salary would be able to take home an extra RM90 in his monthly pay packet, which amounts to RM2,160 over two years.

However, assuming that a 5% dividend is paid out annually with the compound element over a period of 20 years until he turns 55, he will be RM5,500 "poorer" when he retires.

If his monthly income for the next two years is RM5,000, he would lose out on a total savings of RM9,200 in his EPF upon retirement.

If his monthly income for the next two years is RM5,000, he would lose out on a total savings of RM9,200 in his EPF upon retirement.

As it is, the EPF has raised concerns about Malaysians not having enough savings to see them through 20 years past retirement, much less lead a comfortable life.

In a study by the EPF last year, the average contributor has only RM106,000 in his savings while one would need a projected sum of about RM747,000 (taking into consideration inflation rates) if one were to live for 25 years after retirement.

Source : The Star, 16^th Nov 2008.

Warren Buffet reminds investors how to behave now

Times are tough. During these chaotic times, the principals of proper portfolio management are crucial:

1. Don't sell into fear
2. Rebalance your portfolio to buy equity
3. Continue dollar cost averaging
4. Inject cash if you have it

Warren Buffet affirmed this very powerfully in the New York Times last week. Nobody explains it better:

Buy America. I Am.

By Warren E. Buffett


The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor's best friend. It lets you buy a slice of America 's future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky's advice: "I skate to where the puck is going to be, not to where it has been."

I don't like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I'll follow the lead of a restaurant that opened in an empty bank building and then advertised: "Put your mouth where your money was." Today my money and my mouth both say equities.

Source: Warren Buffet, "Buy America. I Am.", New York Times, 17th October.

Opportunities in Crisis

MOST in the investment fraternity agree that with the huge dip in all markets, it's time to go shopping for stocks. Selling at this point would be a poor strategy.

Capital Dynamics Asset Management managing director Tan Teng Boo says people are ignoring that oil prices are now so much lower than what it was in July. Come 2009, inflationary pressures will have eased tremendously, and this will primp markets for another run.

"Low oil prices will definitely help emerging markets, as it will also lower interest rates, hence boost consumer spending,"

"We are getting close to the bottom. If you are 100% in cash, then it's time to invest. Even if you're 50% cash, it's time to start buying. We're not there yet, but getting very close to where we should be long-term greedy. This is a once in a lifetime investment opportunity," he says.

Standard & Poor's Asia Equity Research Services director Alexander Chia sees the bottom happening within the next two quarters.

"Yes, for sure I see opportunities in times of crisis. With bad news being plastered everywhere, it is hard for the investor to maintain his perspective. Don't let emotions take over.

"I don't think people should be buying just yet, as investors are still selling into strength, but I believe the bottom is not far off," Chia says. Chia opines that most funds are cashed up and waiting for that point of capitulation.

"Have your assets very liquid, so that when capitulation happens, you have the bullets to buy. For the time being, I see the market trading rangebound to lower," he adds.

A fund manager says that if one follows the Buffet style of investing, (having a 3-5 year view), present times present exceptional opportunities.

"History has proven it. So if you have the money, it is a good time to start investing," he says.

He adds that when there are declines in the major indices, investors will normally compare sectors and look at the more defensive sectors of the economy.

Says JP Morgan Securities head of broking Clement Chew: "In the short term, its unpredictable. But if you have to buy, some of the sectors to look at would include tobacco, power, telecoms, supermarkets and number forecasting operators. Look at companies that offer deep value with some sort of yield to support it," he says.

Chew cautions that investing in commodities is still risky, as there is still a lot of unwinding in commodity trade going on.

Chew isn't too bullish on properties either.

"The newsflow surrounding property stocks isn't so good, and with lending being curtailed and credit shrinkage everywhere, this wouldn't be such a good time. Regional property companies are trading at wider discounts to their revised net asset values. I don't think you will see property stocks going up," says Chew.

Source : The Star, 11^th Oct 2008

Don’t Rely on Your EPF

Many Malaysians believe their Employee Provident Funds (EPF) savings can fund their retirement. This is unrealistic. By relying solely on your EPF savings, you underestimate the amount needed to retire and overestimate how much you can withdraw once retired.

Malaysia's pension scheme is meant to provide contributors with the basic necessities. Unless you plan to make drastic lifestyle changes after you retire, there is a big chance of exhausting all your funds in just a few years, with escalating living costs and increased longevity.

Living on a quarter of your income

The amount that we have in our respective EPF accounts depends on how much we make. For salaried employees, the mandatory contribution rate to the country's pension fund is 23% of the employee's monthly salary; 12% is contributed by the employer and the rest is deducted from the individual's pay. At age 55, contributors can opt to take the sum along with annual EPF dividends declared to finance the rest of their life. Any withdrawals made before this age, such as to buy a property or pay for medical and educational expenses, will reduce the amount that you receive at retirement age.

All things being equal, with a monthly contribution of 23%, those relaying solely on EPF funds for their retirement will have to live on slightly less than a quarter of their current income every month. Is it possible to live frugally on this sum?

Even EPF officials have consistently highlighted the need for contributors to supplement their retirement funds with other sources of income. According to Deputy Finance Minister Datuk Seri Ahmad Husni Hanadiah, the average Malaysian will have approximately RM120, 000 in their EPF account at the age of 55. This amount provides the retiree with RM500 a month to live on for 20 years. While it can be argued that this meager sum can be stretched to provide for basic necessities (families earning this amount are classified "hardcore poor" and are eligible for government aid), it is not sufficient to provide for those that live beyond the age of 75.

Inflation Surpasses Returns

Inflation is another reason why you should not depend solely on your EPF funds for your retirement.

Inflation pushes up the cost of living. At the very core, inflation means we have to pay more for the same amount (and quality) of goods and services consumed. It eats away the value of your EPF funds. For example, a yearly 5% dividend declared by EPF translates to a real return of 1% if inflation for that particular year averages out at 4%.

As shown in Table 1, the EPF's annual dividends have been just slightly more than the country's inflation rate, which is measured by the consumer price index (CPI).

Table 1: EPF and CPI

		2005	2006	2007	2008
EPF Annual Dividends		5.00%	5.15%	5.80%	n/a
CPI		3.1%	3.6%	2%	5.7%*

*Bank Negara's estimate
Source: EPF and Bank Negara

However, one criticism of the CPI is that it does not reflect the actual consumption patterns of different regions and different income groups. This is could be due to controlled prices for a generic brand of several items in the CPI's basket of goods and services, including cooking oil, white bread and rice. Controlled prices do not reflect actual market prices paid by the majority of Malaysians, especially those living in cities.

Revisions to the CPI basket are also infrequent - the last revision was in 2005. Recognising these shortcomings, the government reportedly reassessed the composition of the CPI and is considering publishing separate inflation rates for urban and rural areas.

CPI is also a poor reflection of inflation experienced by individuals. In June 2008, the CPI jumped to a 26-year high of 7.7%. However, in reality, most people experience a jump in prices that exceed 7.7%. It is more likely that the good and services purchased, especially in the urban areas, reflect the 40% increase in fuel prices and the 18% increase in electricity tariffs.

As more and more producers start passing down rising transportation cost to consumers, we believe inflation will continue at higher levels for some time. This will eat into the value your EPF savings, especially if annual returns declared for this year do not surpass 5.7%, the estimated inflation rate for 2008.

What Can Be Done?

The first step is to stop depending on the EPF. Take responsibility for your retirement and invest with a clear goal in mind. The objective is to invest in assets such as equities that have historically been able to provide inflation-beating returns.

To get started, here are some tips:

1. Invest now.
The sooner you start investing, the sooner you start building your wealth. Take a long-term view and invest small sums over a long period.

2. Take a look at how much you will need to retire.
This is, at best, a guesstimate of the expenses that you will incur when retired. Aim for a higher percentage of your current income, for example 65% to 80% of what you are earning now to sustain the same lifestyle once you stop earning.

3. Diversify.
This can be easily done with unit trust funds. It is possible to invest your EPF funds in approved local funds but your selected investments must make better returns than EPF's annual dividends. However you still need to diversify your portfolio with different asset classes and geographical coverage.

4. No matter what happens – whether the market falls or climbs - always keep retirement as a financial goal and stay invested

Eight Principles of Successful Unit Trust Investing

Unit trust investing is a convenient and sensible way to build one's wealth in the medium and long term. Investment specialists will manage the investments and spread the risks through careful diversification. There are eight principles which are helpful to you in making a wise decision in unit trust investing.

PRINCIPLE 1: KNOW THE BASICS

What Is A Unit Trust And How Does It Work?
A unit trust is a professionally managed investment fund which pools together the money of investors who have similar objectives. The total sum is then invested in a diversified investment portfolio comprising stocks, bonds and other assets in accordance with a fund’s investment objective. The unit price of a fund is its net asset value (NAV), derived from its assets less its liabilities and divided by its total number of units. Unlike stocks, whose prices are changed at each trade, a fund's NAV is based on the closing prices of the stocks in its portfolio on each trading day.
To protect your rights and interests, an independent trustee will ensure that the unit trust fund manager like us complies with the requirements of the deed, Capital Markets And Services Act 2007, the SC Guidelines and the Securities Commission Act 1993. We also appoint an approved company auditor under the Companies Act 1965 to audit a fund's accounts before we publish the fund's annual report.

What Is A Typical Unit Trust Fund Investors' Profile?
A typical unit trust fund investors' profile would be individuals who/corporations that:
•have a similar investment objective as a fund.
•are willing to take some form of risk through participation in the stock market and/or fixed income market.
•want to hold investments that are liquid and easily redeemed.
•want to enjoy a lower transaction cost while investing in the stock market.
•want to have a well diversified investment portfolio which is professionally managed.

What Are The General Benefits Of Investing In A Unit Trust Fund?
•Diversification
For any given amount of investment return, investment risks may be spread over a wide variety of securities in different countries, sectors and securities for a small investment sum. On your own, this will normally require a large amount of effort and capital.

•Professional fundmanagemen
A fund's pooled resources makes it cost-effective to engage a team of qualified and experienced in-house investment professionals such as our fund manager. We conduct full-time regular investment research and analysis and make on-site visits to gain greater insights into the investments that a fund holds. We also invest in research facilities and information resources essential for making sound investment decisions.

•Liquidity
We stand ready to repurchase all or part of your unitholding on any business day.

•Hassle free
It is convenient to buy and sell investment units and you are spared the time, trouble and expense of researching and monitoring investments on your own if you are to invest directly in the stock market.

•Affordability
Only a relatively small amount of money is needed to participate in a professionally managed portfolio of investments. For personal direct investments, you will have to invest considerably more in order to have the same reach in investment opportunities and to benefit from the same level of expertise in portfolio management.


What Are The Risks Of Investing In A Unit Trust Fund?
Credit risk, currency risk, dividend policy risk, market risk and etc etc etc.

How Do Unit Trusts Compare With Direct Investments In The Stock Market And Bank Deposits?
If a person has a very large amount of money to invest directly in individual stocks, he may be able to achieve a sufficient level of diversification. Losses in one or more of his stocks may substantially reduce the value of his portfolio. A unit trust fund, however, has a diversified portfolio and losses in some of the stocks will probably be offset by gains in other stocks. Nevertheless, a person with an undiversified portfolio may reap great returns if one or more of the stocks increase in value. Unit trust prices rise more gradually when some of its stocks rise in price because unit prices are based on the total value of the portfolio. Bank deposits are generally safe with low risk of capital erosion. The returns are however usually lower than investments carrying more risk and may be eroded by inflation more significantly. Unit trusts have historically yielded better returns than bank deposits but such investments carry more risks of loss. The equivalent Islamic instrument for fixed deposits is General Investment Accounts.

Management Expense Ratio (MER)
MER will inform the investor of the total annual expenses incurred by a fund as compared to its average NAV. Management expenses include management fee, trustee fee and expenses incurred for fund administrative services. A low MER indicates the effectiveness of the unit trust manager in managing the expenses of the fund.

MER = Total annual expenses incurred by the Fund x 100
Average net asset value of the Fund

Performance Indicators/Benchmark

Investors measure the performance of their investments in unit trusts by various means, and very often take into account pure price changes (rise or fall in unit prices) or the amount of distributions received from a fund. The appropriate method of calculating performance is by including both. This performance measure is called total returns as it includes all sources of income and gains (or losses). Investors need not compute these calculations themselves as total returns figures are published weekly in leading financial magazines, local daily newspapers and foreign financial publications, or the websites of the financial institutions concerned. For a better picture of a fund's performance, you may look at both short (three to six months) and longer-term (three and five years) performance figures. Performance benchmarks such as Kuala Lumpur Composite Index (KLCI), FTSE Bursa Malaysia EMAS Index and FTSE Bursa Malaysia EMAS Shariah Index are used to measure the relative performance of equity funds. For global investments, benchmarks such as the MSCI All Countries World Index, MSCI Asia Pacific Ex-Japan Index and the Dow Jones Islamic Market World Index are used. The performance benchmarks for bond funds are the fixed deposit rates or General Investment Account (GIA) rates (one year) as quoted by a major Malaysian financial institution. The performance benchmark for balance funds is a combination of the performance benchmark for equity funds (e.g. KLCI) and the benchmark for bond funds (e.g. fixed deposits rates), in a ratio that reflects the funds’ general asset allocation. For example, a balance fund with a 60% equity allocation mandate would be compared against a composite benchmark comprising a hypothetical investment of 60% in KLCI and 40% in 3-month Kuala Lumpur Interbank Offer Rate (KLIBOR) rates. Other fund categories such as equity and income funds may also adopt composite benchmarks to properly reflect their maximum equity asset allocation ratio.

Who Regulates Unit Trust Funds In Malaysia?
The Securities Commission regulates the establishment and operations of unit trusts in Malaysia under the Capital Markets And Services Act 2007, Securities Commission Act 1993, the SC Guidelines and other relevant securities law. This requires, among other things, that the unit trust fund manager and the trustee create a deed and register it with the Securities Commission. A copy of the deed may be inspected at the unit trust fund manager's office.
In addition, the Securities Commission has placed stringent requirements in the appointment of the unit trust manager, the trustee, the unit trust manager's directors, chief executive officer, investment committee and Committee Members/Shariah Advisers. The appointment of all these parties must be approved by the Securities Commission.



PRINCIPLE 2: KNOW YOURSELF

It is conventional wisdom that you should be willing to accept more risk if you are looking for higher return, or be happy with less return at lower risk. There is however some flexibility in planning to meet your needs and preferences. Answers to the following questions can serve as a guide to choosing the most appropriate funds for investment:
•What stage of the life cycle am I at now?
•What are my investment goals?
•What kind of returns am I looking for?
•How much risk am I comfortable with?


PRINCIPLE 3: INVESTMENT STRATEGY
Most unit trusts work best when taken as an investment vehicle for the medium to long term. Funds selected for investments should be appropriate for your investment horizon, financial goals and risk profile. Attention should also be given to hedging against inflation and achieving a good degree of diversification. Circumstances may change and you should review your strategy regularly.


PRINCIPLE 4: START EARLY
The power of compounded returns (returns generating more returns) makes it wise to start saving and investing as early as possible. There may still be the risk of decline in the capital value of investment, but a longer investment horizon will certainly give more room for riding out the bad times or the occasional setbacks.


PRINCIPLE 5: INVEST REGULARLY
Regular investments have benefited in many cases from the principle of Ringgit cost averaging. Instead of trying to time the market, which even the experts have difficulty achieving, invest a fixed amount regularly especially when such surplus has been budgeted from a regular stream of income. This practice of investing regularly has a tendency to average out wild fluctuations in prices to your benefit.


PRINCIPLE 6: INVEST FOR THE MEDIUM TO LONG TERM
Historically, unit trusts have provided better returns in the longer term, but have entailed greater short-term risks than other savings vehicles. Your planning and expectations must accordingly be attuned to a longer investment horizon. Unit trusts offer potentially higher returns over the longer term although they do present wider fluctuations in the short run.


PRINCIPLE 7: DIVERSIFY YOUR PORTFOLIO
Diversification, or spreading your investments among the various fund options can help ride out interim fluctuations. It works because the different asset classes have different fundamental characteristics and can move in different directions. For example, when the economy faces a downturn and interest rates are falling, bonds will usually outperform equities, whereas when the economy is booming, equities will generally outperform bonds. In the long run, diversification increases returns while lowering risks, which is why it is the single most important part of any investment strategy.


PRINCIPLE 8: MAKE ADJUSTMENTS OVER TIME
Review your investments regularly to ensure that they still reflect your financial goals and personal circumstances. For example, at one stage of your life you might be seeking longer-term investment that focuses on building savings and accumulating capital. Later on, you might prefer a lower-risk investment that places more emphasis on income. Whatever the reason, making adjustments over time is essential and needs to be incorporated into your investment strategy. Through regular monitoring you can ensure that your investment portfolio continues to match your financial objectives.

10 most common investment mistakes

No.1 Investing at the peak of an economic cycle
It is always easier to invest when everything is rosy, when confidence is high and when your friends tell that
they are making money. Worse of all, when you join in the fray, the bubble burst, so what do you do?
You decide to stay out and let the investment value ride backup to recoup your capital. The problem is
if you invest at the peak of cycle, It maybe another 5 years before you could see the peak again.

No.2 Taking advise from an 'accurate source'
Most investment losses can be attributed to following third party "hot tips" and advice without doing homework.
Some even claim they had insider information of that the news came from the horse's mouth.
It is sounds too good to be true, it is usually not true.

No.3 Afraid to value cost when returns are negative
Value cost averaging is one strategy to average your cost and lower your investment's breakeven point.
For this strategy, you must have enough capital to value cost. You will give your investment vehicle enough
time to come back up again, and most importantly, your investment vehicle must have the capability to rise
in value eventually.

No. 4 Unaware of the status of investments
Many investors know exactly when their fixed deposits are maturing but have no idea when it comes to their more
volatile and growth-oriented investment. Investment must be tracked more regularly than fixed income vehicles
knowing their value and how they have performed over time helps you to seize opportunities to sell or accumulate
more for value averaging purpose. However, do not monitor too frequently as it can cause you to panic and sell
your winners too soon.

No.5 Not having a required rate of return
Investors do not often set a target of return for their investment. Even if they do, they shift their targets as greed
sets in, especially in bullish market. This can be dangerous as sudden event in the market can wipe out profits.

What one needs to do in a bullish markets is to sell the profits when the desired rate of return is met and continue
to monitor the capital for further market upsides. However, if you are new or conservative investor, it is better to
realize your capital and profit once your target rate of return is met.

No.6 Not Rebalancing Portfolios (switching)
During the 2003 war of Iraq, an investor announce that his investment planner had told him to switch his equity
portfolios to bond as the war could be a potential danger to his equities. I met the same investor again at the
end of year 2003, he said he had lost about 15% in his bond investment in the 2003 bond market crash.

Unfortunately for him, rebalancing portfolio was done a single isolated event. He had forgotten that rebalancing
must be done consistently in different cycles under which specific investments are exposed to. It is a good
practice to rebalance the portfolios at the most twice a year, unless a sudden expected event occur.

No.7 Focus on popular investment
Investors feel comfortable when they had invested in highly published. Some of these are good investments and
are worth looking into but do your homework. Check if they suit your investment goals and time frame.

No.8 Focusing on guaranteed investment?
Having your capital guaranteed but you need to realize what they are guaranteeing, capital or returns? This promise
of "capital guarantee" usually devices in our understanding of balancing the cost of other investment opportunities
during the holding period against the security of not losing our capital at the end of tenure. Putting money into capital
guaranteed fund is only suitable if you do not need the funds within the holding period and you have a diversified
investment portfolio.

No.9 Not having an investment philosophy
It is just a simple statement of your style and taste. What allocations you have set, which type of risk you want to
adopt and the time frame you have set to seek return in your investment portfolio . Having an investment philosophy
will prevent you being overly greedy or overly fearful.

No. 10 Transactional type of investment
For most of us, the only purpose of investment is to make the money.After that, what is the next, Your investment
must be purpose driven, for example , to clear debts, funds a comfortable retirement or send the kids to college.
Remember, greed, short term return is not a purpose.

When You Should Borrow Money to Invest

One of the most common question I get is this: is it a good
idea to borrow money to invest in investment x (the x can be
unit trusts, ASB, properties, business, Bank Rakyat shares,
etc., etc.)?

Let me answer the question in real world terms.

Firstly, that is how folks build serious money - by using
other people's money. This strategy is a regular occurrence
in business. Entrepreneurs borrow money from the bank to
finance their expansion. They conquer the world, repay the
loan and make tons of money. And that is always a good thing.

Now this concept of borrowing money to make more money works
a treat for businesses as the margins are wide. The interest
charged for the loan is often below 10 percent, but the
business reaps 30, 50 or even 100 percent return on their
investment.

Further, because of the wide margins, even when the returns
drop, the businesses still make loads of money.

Now you can see why this concept is made-to-order for
businesses.

However, the same does not apply when it comes to
investments such as shares or unit trusts. Often time, the
margin or spread between the interest and return is slim -
less than 3% most of the time. For example, the interest
charged is 9% but the return is only 12%.

Now if the situation remains like that - with the interest at
9% and return at 12% - things are still hunky dory. You would
do well taking the loan and making the investment. However, what
usually happens is that the return starts to drop off. From
12%, they drop to 10% and then to 9%. (By the way, this is
what happened to the fabulous ASB.)

The way things are going, the return could very well drop
below the interest charged! And this is not an unusual
thing. When that happens, instead of making money, the
investor is now forking out money. And that, needless to
say, is not a very nice thing to happen. Not exactly the stuff
of fairy tales. (By the way again, this is what usually happens
when folks borrow money to invest in stocks.)

Now after painting the real world scenario let me answer
the question. Yes, you should borrow money to invest - if
the spread is wide (more than 5%) and you are pretty sure
that the situation will remain status quo for the loan
period. For example, if the interest is 9%, the return
should be at least 14%. Otherwise, let others be the
test-pilot. You watch by the sidelines.

Now, I know a lot of people will jump and shake their heads.
They will reminisce of how their father, grandfather, uncle,
auntie or neighbor made tons of money by borrowing money
to invest even when the spread was ultra-thin. Of course it
can happen. People also strike the lottery but has it
happened to you?

If the spread is thin, you are taking an unnecessary risk.
While you can make a little bit of money, the chances
of you losing a lot of money are significantly higher. Once
the return starts to drop and/or the interest start to rise,
you lose both money and sleep. And that is no way to make a
fortune.

In case anyone thinks that this is a theory from the ivory
tower, I personally will not borrow to invest if the spread
is less than 5%. In fact, I will not borrow to invest in
unit trusts or shares - period. I only borrow money to
expand my business and for property investment.

Source : MILLIONAIRESPLANET EZINE-
September 2006 (issue #49), By Azizi Ali

Unit Amanah vs Simpanan Tetap vs Simpanan Biasa

UNIT AMANAH (Unit Trust)
Merupakan satu pelaburan kolektif dengan pengurusan dana secara profesional dan melalui pemantau pemegang amanah.

Kebaikan
- Risiko diagihkan supaya terkawal
- Mudah cair (liquidity)
- Diuruskan secara professional
- Modal permulaan yang rendah
- Mudah top up dengan nilai serendah RM100

Keburukan
- Tertakluk kepada beberapa jenis profail risiko.

SIMPANA TETAP (FD)
Merupakan pelaburan yang menjamin kadar pulangan tetap pada tarikh matang

Kebaikan
- Pulangan dijamin
- Risiko hampir tiada

Keburukan

- Kadar pulangan (4%) tidak dapat menyayingi kadar inflasi masakini (7%).

- Tidak dapat pulangan sekiranya dikeluarkan sebelum tempoh matang.

- Tidak sesuai sekiranya mahu mengamalkan penambahan simpanan secara top-up.

SIMPANAN BIASA

Simpanan wang yang memberikan kadar faedah yang kecil samaada dua kali setahun ataupun bulanan.

Kebaikan

- Tahap kecairan yang tinggi

- Risiko hampir tiada

Keburukan

- Kadar pulangan (2%) tidak dapat menyayingi kadar inflasi masakini (7%).

- Dalam jangka masa panjang objektif menabung gagal dicapai kerana kikisan kuasa membeli

-Simpanan mudah menyusut kerana dapat mengeluarkan wang pada bila-bila masa sahaja

Artikel dipetik dan diolah dr buku Rahsia Melabur dalam Unit Amanah.