Why Mutual Funds Are Great For First Time Investors

CompareHero.my gives you the lowdown on what you need to know about mutual trust funds and why it’s ideal for first time investors.

What Are Mutual Funds?

Mutual funds (a.k.a. unit trust funds in Malaysia and referred to as such in this article) are an investment method whereby assets management companies (e.g. securities investment trust companies) get capital from the public by issuing specific quantity of shares or beneficiary certificates.

The company then uses the investment from the public as capital for their professional investments. Basically, it is an investment method through the sharing of risks and profits. Among the types of unit trust available are equity funds (the most common type), fixed income funds, real estate investment trusts (REITS), balanced funds as well as syariah funds.

There are risks involved when you choose to invest in them, but you can also decide the risk tolerance level and choose to invest in unit trust with risk ranking from low, medium or high risk.

Why It Is Good For First Time Investors?

Affordability

Unit trusts are affordable and beginners can start with an investment from as low as RM100, depending on the type of unit trust fund you invest in. You can then buy additional units when you have more money and grow your investment.

Regulation

As a beginner in investing, you can take comfort that unit trust funds in Malaysia are under the regulation of the Securities Commission Malaysia which is the sole regulatory body for authorization of establishment of unit trust funds, including the approval of the fund’s management company.

Professional Management

Investing also means that an individual would need to maintain his or her own portfolio of investments. This includes keeping up to date with the financial market information which can be difficult for individual investors.

What’s great about investing in unit trust funds is that it transfers most of the hassle to the professional fund managers. The people who are entrusted to manage the unit trust are all approved professionals whose training and background ensure the decision making will be based on sound investment principles.

Diversity

For those interested in equities but lacking the funds to diversify, unit trust funds offer the opportunity to invest in diversified portfolio with a low starting capital. Rather than investing into a portfolio of only one or two investment or shares, the unit trust portfolio usually consists of a combination among which are cash, bonds & deposits, shares, properties and commodities.

Simply put, the wider the spread of the investments means less chance for volatile investment returns. So investing in unit trust provides a diversification of risk along with opportunity to invest in a diversified portfolio.

Beat The Inflation Rate

You can have the option to invest in low risk unit trust funds, making it a good option for first time investors rather than leaving your money idle in the bank. Investing in unit trust funds can help you beat inflation and make your money work for you as most funds provide potentially higher returns compared to if you were to put your money into a savings account.

How To Choose The Right One? 

The first thing to do is to weigh the risks and merits before deciding on an investment. You do this by reading the prospectus of the company which you are looking to invest into. You need to know how your money will be invested, where it will be put into and also the fees and charges involved.

Among the charges are the initial service charge and the annual management fee. In addition, the key factors to take into consideration when deciding on an investment is the safety criteria, stability, liquidity and the risk-adjusted returns.

When Is The Right Time To Invest?

Before you decide on any investment, you need to set your financial goals. Are you looking to generate a second income or looking to grow your money? If you’re looking to grow your money, ideally it would mean the investment would be a long term investment. If you’re planning for the investment to be a form of your second income, then it would be a short term investment. The next step to take would be to make sure you clear any existing debts before you start investing your money.

Check out InvestSmart by Securities Commission Malaysia for more information and to get the latest updates on unit trust funds.

UMA - Don't you think is a waste of time?

Every now and then we are exposed to Bursa's query for shares that have surged (sometimes drop more than usual). But does is help?

The query on XOX. I think I can figure out what the answer would be...

Stopping PLUS toll collection - REALLY?

I am hearing from Lim Guan Eng that he can eliminate the toll for PLUS based on the youtube video below.

Not so easy. PLUS has RM30 billion debt. Who is going to pay off that debt? EPF owns 49% of PLUS while Khazanah owns remaining 51% of it. Is the government going to pay off that debt for PLUS? Agree on the return for PLUS but I do not think one can so easily dismantle the debt issue. To be frank, it was actually a very smart move by all the parties involved in the privatisation of PLUS. It is structured in a way where if we are to stop the toll or soften the price hike, it will affect the EPF contributor's pockets - i.e. yours and mine. Damn if you do, damn if you don't. They are quite smart people out there structuring this deal!

In restructuring to take tolls out of PLUS, one will definitely need to obtain the approval from the bond holders. Easy? Nope. Otherwise, they would need to find RM30 billion to pay the bondholders off.

Based on the principal amount of RM30.6 billion debt and at weighted average yield of 5%, its interest is more than RM1.5 billion/year. Ever wonder how it can be barely profitable? Huge interest costs of course.

So now on investments - with its ability to fund a RM30 billion debt, do you know what is PLUS cash generation capacity? HUGE!

Interest payment alone is going to be around RM25.4 billion. Total repayment including interest over the 27 years is going to be about RM56.2 billion. That's how much the banks think PLUS can generate free cashflow over the 27 years from 2012 to 2038, at the very least. This comes to on average more than RM2  billion a year.

Buy Airasia

A stock which I have been looking at for a long time - have previously purchased and sold cause I felt that others could have gained more.

It has been sold down crazily due to fear as well as foreign selling so much so that many is thinking that it would have collapsed. This is definitely not me chasing the stock. However Airasia has seen substantial rebound from its down previously. If I am not mistaken, it has gone to below RM0.78 - something unthinkable of.

This is a company which has built value over the years and to trade at substantially below its Net Asset Value of RM1.70 is crazy. But the market has been crazy. I definitely have taken some buying position but not in this portfolio.

Globally, economy is not getting better, but essentially that's good for a low costs airline right? I still believe that Low Costs is the way to go. Or shall we say the ways airlines will operate in the future will change - or already on the way. It is not low costs but more like minus the frills.

Southwest Airlines has been benefiting from low prices of oil and so are many other airlines companies especially the Ryanair, Easyjet etc. Airasia, Lion Air, Cebu Air are all going to benefit the same as their model is based on providing less for a lesser fee. Hence it makes the fuel costs to be a significant portion of the costs for these airlines. When fuel price drop by more than 50%, that essentially brings benefits to these players.

For Airasia, the weakening of RM will bring some causes of concern but it has managed to hedge some 52%+ of its exchange risks. I am also seeing that it has managed to build its cash position but delaying or foregoing purchasing of new planes. This is probably due to the glut of planes for lease as well as slowing down of its expansion.

I think the breather is good as it will provide Airasia time and avenue to replan and stabilize. All in all, I am pretty bullish of its future despite it climbing back from its low of RM0.78. At RM1.12, it still has a lot to climb in the short to medium term. Longer term, Airasia is the way and model to go.

Sell Padini

Felt that much more could be gained from some other stocks. Although Padini is a good company, there are others that are getting much more attractive now. In the future, costs is playing a big role despite prices of commodities like cotton is already substantially down.

Economy is definitely slowing as we can see in Malaysia and regionally.

Hence decided to sell all of Padini at RM1.41. It is sold at a loss despite the company providing consistent dividend. I am definitely selling to buy something else.