By Chee Jo-Ey
UNIT trusts are conventionally the go-to investment product for building up long-term savings. A unit trust is a portfolio of different assets, which include shares, bonds and real estate, among other investments.
As unit trust funds are professionally managed by fund managers, they are well suited for hands-off investors or those who are just starting out in the investment space.
They are also often marketed as retirement schemes as they provide diversification and have gained a reputation so strong that Malaysians would move their Employees Provident Fund (EPF) savings to these funds once they retire.
Although unit trusts are a common option of investment for many who want to build their nest eggs, investors need to be aware of the fees and costs of going into such investments.
According to news reports, fund management companies in Malaysia are known to charge retail clients fees that are quite high compared to others.
“With the upfront sales charge of (as high as) 5.5%, the investment houses in Malaysia are charging one of the highest fees in the region. Take a look at our neighbour, Singapore, (where the) upfront sales charge is almost at 0% for most of the unit trust investments,” says iFAST Capital Sdn Bhd research analyst Jerry Lee Chee Yeong.
He stressed that investors must first find out the fees they are charged for their investments.
University of Malaya department of finance and banking, faculty of business and accountancy senior lecturer Dr Eric Koh agrees that charges for purchasing unit trusts “may seem high”, but unit trust investors may take some comfort that their funds are managed and monitored by professionals. “Unit trust funds provide avenues for retail investors to diversify their investments into several stocks, industries or even countries,” he explains.
“However, the players should find ways to lower the charges to make it an attractive investment avenue once again. There should be a more concerted effort to show how they add value to the investments. Besides, there should be a more critical review of the cost components along the value chain,” Koh adds.
Entry fees that range from 5% to 6% imposed on total funds invested are among the highest in the world. There are several other fees that you might need to pay when purchasing unit trusts from a company. The fees vary according to the type of products.
For example, a percentage of the total assets managed goes to the management fees that are to be paid annually. Those who are new to investment need to be aware of the costs and charges that come along with certain investment products and services. Most of them do not even know that there are costs when purchasing these funds managed by professionals.
The costs may seem small at first but do not underestimate the impact they have on your returns over the long term.
Going, going, gone online
Like most things nowadays, buying unit trusts over the net is the norm. In years past, fund management companies rely mainly on sales agents to sell their investment products but this has changed in recent times.
The advent of technology has everyone demanding for the world to be at their fingertips. Migration towards digital platforms for unit trust purchases is something unavoidable and even financial institutions are catching up.
Public Mutual has a platform for investors to buy unit trust products online. All you need is an online banking account registered under your name and you can create your profile on its website, fill up personal details and start buying unit trusts online. Investors no longer need to walk into the bank to invest in unit trusts.
The minimum to open an online account for unit trust investment is at RM1,000. Sales charge applies and varies depending on the product. Bonds have a sales charge of 1% while high-risk products like equities with balanced and mixed assets have a higher sales charge of 5.5%.
Gone are the days when investors need to walk into the bank to open an investment account and speak to fund managers before making an investment. The online purchase of unit trusts requires only a few clicks and can be done anywhere, anytime.
Self-service unit trust purchase has obvious benefits for both investors and providers. For one, it allows for easier transactions and cheaper options for investors as digitisation reduces costs. For unit trust companies, they enjoy a wider reach at a lower cost. Lower investment costs simply mean that investors will get to see their returns faster.
“Instead of investing through agents, investors can opt for online platforms like FSMOne (previously known as Fundsupermart.com). Those who invest with us via FSMOne are only charged an upfront sales charge of 1.75% instead of the industry rate of 5.5%. From there, investors would have saved about 3.75%,” says Lee of iFast.
FSMOne is an online platform of iFAST Capital Sdn Bhd that serves mostly retail investors.
“For those who invest via the FSMOne platform, they might need to do their own analysis and study the unit trust funds available. Hence, if investors wish to leverage on our expertise as they have little or no time to carry out their own analysis on the available mutual funds or to construct and manage their own portfolio, they can consider the FSMOne Managed Portfolio, which helps investors build, monitor and maintain their portfolio,” says Lee.
Millennials are also the most digitally savvy investor group, according to Accenture’s Wealth in the Digital Age Investor survey in 2017, and they are starting to enter the investment scene.
As they begin to earn more and collect more wealth, millennials will be a critical client segment for fund managers to zero in on and most of them are online.
Although unit trusts are one of the more popular options for budding investors, some may be turned off by the fees and costs that come with the purchase of such products.
Unit trusts are deemed by many to be the ideal tool for those who are just starting out in the investment space but it is also known for its high fees and costs.
It is also one of the more common options for investors who want to build nest eggs for long-term goals but charges that come with it can deter some from investing in unit trust funds.
Unit trusts through EPF at lower cost
The Employees Provident Fund (EPF) operates the i-Invest online platform that allows eligible members to invest in unit trust funds offered by fund management institutions (FMIs) approved by EPF at nearly 0% sales charge compared to the current 3% for offline and traditional transactions through agents.
Finding alternative options with lower costs will allow investors to maximise returns. The sales charge that comes with unit trusts may look small but over the long term it can really eat into investors’ returns.
These little savings and potentially extra returns could translate into a huge impact on portfolio returns in the long run.
Prior to this, members are allowed to transfer a percentage of their savings for investment in unit trust funds under EPF’s Members Investment Scheme.
Under this scheme, members who have sufficient savings can transfer part of the funds in Account 1 for investment via the appointed FMIs, including unit trust management and asset management companies.
EPF’s basic savings is a predetermined amount set according to age in Account 1 to enable members to achieve a minimum savings amount of RM240,000 when they reach age 55. The amount in excess of the basic savings can be invested by appointed FMIs.
To ensure that investors are as informed as possible, i-Invest also has tools to obtain and compare relevant information, and enables the right selection of unit trust funds that would best suit the members’ savings goals.
Private retirement schemes
Private retirement schemes (PRS) are also a long-term savings scheme regulated by the Securities Commission that investors can consider as well. It is considered as one of the safer retirement savings options in Malaysia. As it is a voluntary scheme, no fixed amount of contribution is set.
For instance, you could contribute a minimum of 10% of your monthly salary to grow your retirement savings with PRS. What’s more, investors also get to enjoy personal tax relief of up to RM3,000 per year should they fulfil all terms.
The PRS allows Malaysians whether employed or self-employed to supplement their retirement savings under a well-structured and regulated environment.
To start your PRS savings, you can choose to make contributions directly to a PRS provider or through its registered distributors. You may choose to contribute to one or more PRS providers.
Under each PRS provider, you are asked to choose to invest into one or more funds by either contributing based on the default option (age-based selection) or choose your preferred fund. There may also be differences in fees and charges among the providers.
Public Mutual charges investors sales charge of up to 3.0% of net asset value (NAV) per unit for its PRS Equity Fund (PRS-EQF).
Passively managed funds
Unlike previous generations who may not have access to different kinds of products for diversification of portfolio, investors these days are spoilt for choice. Alternative investment products like cryptocurrencies, exchange-traded funds (ETFs), peer-to-peer financing and more have cropped up.
ETFs are another low-risk investment investors can look out for. They are low-cost and hold a basket of stocks or other securities, increasing diversification.
“Some people may want to invest directly in a diversified portfolio of stocks or even some form of exchange traded fund. The idea is to invest in a diversified market portfolio. While this substantially reduces the fees, the investment outlay itself can be costly,” says Koh of University of Malaya.
ETFs are mostly passively managed, as they typically track a specific market index and they can be bought and sold like stocks.
Passively managed funds are those whose investment securities are not chosen by a portfolio manager, but instead are automatically selected to match an index or part of the market. So, it is unlike an active fund that has the manager curating securities for investors.
ETFs’ attractiveness has always been their versatility as they cover a wide range of options, just like unit trusts. Moreover, they are also typically cheaper than many unit trusts.
ETFs are very popular in the US and Europe because actively managed funds have been having a hard time beating the market in recent years, prompting investors to think that it might be better to stick to lower-cost ETFs that can maximise their returns.
Most robo-advisors also use ETFs. Robo-advisors are digital platforms that provide automated, algorithm-driven investment services with little to no human supervision. Investors with lower start-up capital can consider working with a robo-advisor that provides a low-cost solution.
It is also easy to get started with a robo-advisor. All you need to do is create a username and password, answer a few questions as part of risk profiling and you are given an account. Users can even automate deposits on the platform.
An example of a robo-advisor is StashAway, which charges management fees that range between just 0.2% and 0.8% annually compared to the 1.25% to 5% annually charged for traditional banking products. – Feb 6, 2020