One of my friends asked me: how to evaluate whether a unit trust fund is good, other than looking at the past performance?
He mentioned that an unit trust consultant approached him with unit trust fund investment with awesome track record. But he is not clear of how unit trust fund work and how to find star performing funds.
Do you have the similar experience?
Generally, humans are attracted to to beautiful person, scenery and items. Same goes to investment! We are magneted to unit trust fund with splendid past performance, aren’t we?
Please note that historical data does not indicate future performance, as business environment is always dynamic.
Before you decide on any investment, its important to understand the basic.
What is unit trust investment?
Unit trust investment is a collective investment, where a multitude of investors pool their money into funds managed by professional fund managers under unit trust management company (UTMC).
Imagine yourself as a kid (investor), you pass your piggy bank money to your mom (fund manager), with the intention to grow your money (so that you can buy more candies, ha!)
What is the role of a fund manager?
A fund manager manages the fund and decides which sectors to invest. The key in unit trust investment is diversification, as in money is invested in different sectors and asset classes to reduce overall investment risk.
You can imagine your mom as fund manager, because she manages the money.
Then, you might be thinking, what if my mom does not invest the money as agreed? Here comes in your dad – trustee of unit trust fund!
What does unit trust trustee do?
Trustee ensures that fund manager runs investor’s money according to the agreed investment objectives and safeguards the assets.
Basically, dad makes sure that mom does invest your piggy bank money accordingly. Phew, your money is safeguarded now!
Now, the next question is how do I know whether the unit trust fund is good?
If you are given a choice, would you want a rotten apple or good one? If you are given enough information, do you want a star or worst performing investment?
Now, imagine that you are surfing internet to book hotel for your coming Christmas trip to London. How do you judge whether the place meets your expectation (Free WIFI, Free breakfast, Free spa, etc)?
I am sure that you will read the reviews and star rating of the hotel, yes? Same goes to unit trust fund evaluation. You can find out the rating of a unit trust fund to evaluate whether it is superior or inferior.
You can find out unit trust fund rating by the following investment research and investment management companies.
- Morningstar
Rating: 1 – 5 with 1 = lowest & 5 = highest.
https://my.morningstar.com/ap/main/default.aspx
- Lipper Rating
Rating: 1 – 5 with 1 = lowest & 5 = highest.
3 parameters are measured under lipper rating: Total Return, Consistent Return, Preservation.
Generally, it is recommended to look for 4 to 5 in both morningstar & lipper rating. With these ratings, you will have an idea on how is a particular unit trust performing compared to its peer in the same category.
Choosing a fund is just like choosing your life partner, you will take time to understand the person before deciding, ya? It is worth your time before deciding on your investment as well.
Now you have taken effort to read till the end, I can tell that you are serious about your personal finance! Therefore, here is a bonus for you!
I am giving out one session of free consultation on personal finance worth RM 99!
Send me a comment and I will keep in touch with you.
Soo Yee On The Numbers 