Last Updated on 11, April 2014
Here is a video on the topic on myths investing in unit trusts. The poor returns from unit trusts investors complained about is due to the myths held on by investors rather than the quality of the product. The unit trust product is neither superior nor inferior.
The video is 3 minutes and can be viewed using smartphone. It is closed capture so there is no need to turn on the volume if it is not convenient to do so.
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If you prefer to read, the following is a transcript of the video:
Most investors experience with unit trusts are negative. Many investors complained to me that their unit trusts did not perform well. Normally such complaints were due to 3 myths they held on to:
First, it is a myth that investing in unit trust is a standalone decision. From 2000 to 2008, banks were notorious in pushing unit trusts that were 'favor of the month'. In 2000, it was the technology funds. Prior to 2008, it was the India and China funds. In 2008, it was commodity and gold funds. Managed futures funds were also hot funds. Many investors bought unit trusts without having any thoughts about how the investments is correlated with their other investments. In other words, there was no asset allocation decision. We know from history that massive amount of money was lost due to buying into favors of the month. However, most investors just blame the funds' for poor performance. In other words, investors blamed everybody except themselves for not having a proper asset allocation.
Second, it is a myth that unit trust will always give positive returns. In fact, the performance of the unit trust is closely linked with the market which it invests in. For example, a Malaysia fund will suffer a lost if the Malaysia market suffers a lost. It will be strange if the fund make a gain. In fact, making a massive gain when the underlying market suffers a lost is an indication that the fund is showing signs of problems. Those who lost 80% of their money in technology funds should ask themselves this question: was it due to the poor performance of the underlying market or was the fund really that bad?
Third, a unit trusts cannot be used as a buy and forget investment because it can “underperform”. A unit trust is said to underperform when it consistently ranked as one of the worst compared with its peers. For apple-to-apple comparison, it has to be compared with other similar funds. Once the unit trust is ranked consistently as one of the worst performance compared with its peers, it must be replaced as there is a tendency for a underperforming fund to continue underperformance. This replacement is called switching. Most investors do not do this because they do not have time to monitor. Moreover, it is costly to switch as they will be charge again for the replacement fund. Therefore, it is important to ensure that the switching is free. Nevertheless, unlike investing in stocks, unit trusts do not require so much monitoring although it is definitely not an investment which you can buy and forget.
My advice to investors is to examine whether do you have a proper asset allocation in the first place? Were the losses in the unit trusts due to the underlying market? Do you actually monitor the funds and perform switching to avoid continuing investing in a poor performing fund? If you are unsure, it is time that you consult a professional financial planner.
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