Wednesday, December 3, 2008

Unit Trust - Question on Return of Investment

Have anyone ever question this situation:

One decided that he wanted to invest into Unit Trust. So, he walks to a Unit Trust house, we named it Super Trust Bhd. An agent then proposed him to buy Super Trust Fund.

In his explanation, the revealed that Super Trust Fund, charging 5% for entry fee. For example, if he decided to spend RM1000 - Super Trust Bhd will take 5% that is RM50 out of that amount. So, he is only left RM950 to buy the Super Trust Fund.

The agent explain further, Super Trust Fund has been in the market for 5 years and during the period has given dividend in average of 7% which sounds a lot to him.

The nice agent who offered him free drink then adds, every financial year Super Trust Bhd will charge 1.5% for management fee. That sounds little to him.

When he gets back home, he does few calculations.

1. He decided to spend RM1000 to initially purchase Super Trust Fund.
2. He already knows that entry fee is RM50.00 (5%)
3. End of each financial year, there will be 1.5% charge translated as RM15.00
4. Ok, average returns is 7%. He made a little assumption that price fluctuation deviation is very small and can be ignored.
5. From (1) to (4), he tries to determine net profit (return) from his investment.

His results:

1. For the first year: Profit 7% minus entry fee 5% minus management fee 1.5% leaves him only 0.5% of net profit.
2. If he decided not to buy or sell his holding for another year, the net profit will be 7% minus management fee 1.5%, leaves him at 5.5%

That sounds good, because it is good!

But, since Super Trust Fund's price is not fixed and it is fluctuated, he wants to consider Dollar-Cost-Averaging and he invest in fixed and orderly time manner. Again, he made assumption that price deviation is very small and can be ignored.

Year 1
Initial investment: RM1,000.00
Deduction: 6.5%
Balance: RM935
Balance brought forward after dividend: RM4.68 (RM939.68)
So, losses for the first year is RM60.32 (6%)

Year 2
Balance brought forward: RM939.68
DCA addition: RM1,000.00
Deduction - Entry Fee: RM50.00
Accumulation after Deduction: RM1,889.68
Deduction - Management Fee: RM28.35
Balance: RM1861.33
Dividend at 7%:
Balance brought forward after dividend: RM130.29 (RM1,991.62)

Year 3
Balance brought forward: RM1,991.62
DCA addition: RM1,000.00
Deduction - Entry Fee: RM50.00
Accumulation after Deduction: RM2,941.62
Deduction - Management Fee: RM44.12
Balance: RM2,897.50
Dividend at 7%:
Balance brought forward after dividend: RM202.83 (RM3100.33)

Only after 3 years, then he gets back his capital and dividend RM100.33 translated as 3.34% or average 1.11% a year.

Well, it sure seems that 1.11% per annum is below annual inflation rate...

So, I really like to ask - is Unit Trust really a good vehicle to ride on considering that fund houses in Malaysia (we have many: Public Mutual, ASNB, CIMB Principal, MAAKL, and lot more) charging high entry and exit fees which at some point above the particular funds annual returns?

This is something that no one really asking and want to look into - but still we need to consider the cost of our investment and do we really get a good returns as promised. When our returns below inflation rate - I really have nothing to say.

Anyone has to comment?

Ok, I shall add more discussion to this. At the mean time, do think about the calculation above and do you really "investing" in Unit Trust?

I shall write comparison Pros and Cons between investing in Unit Trust and Stock Market. But that would be later, when I have enough time to put things together.

Disclaimer: Figures and name here just for example and rough calculations only. I may be wrong in the idea of presenting it and I would be much appreciated if someone who has better "lights" and knowledge to share it with me. One more thing, I am not associated with any fund house nor selling or promoting any fund.

1 comment:

Zaidey said...

Dear Aleph...

It seems that the calculations, assumptions, as well as your knowledge in financial matters is still shallow.

Many of your arguments, and your example situations are wrongly deduced.

Sadly, your analysis is wrong in many places.

I will e-mail you the answers for your wrong deduction, one-by-one to your personal email, as it is too long to produce here.

Thank you.