Buying “Unit Trust” or Buying “Meat”

unit split

Yesterday, when I turned on Fundsupermart (FSM) website to check my fund investment. I saw one of my funds dropped into a loss of 63%. When looking up its price again, it fell to 0.6299 from 1.8931 in one day. I was deeply shocked, I thought there might be some price adjustment by the fund house for some reasons! After searching around FSM website, there was no news at all. Then I turned to ask from my CIS (Client Investment Specialist). He told me that the fund house decided to split the fund price from one unit to three units. In order to determine the reliability of the news, I went to the fund house web search to verify. The news was ultimately confirmed.

However, something puzzling me. The news article stated that the fund house decided to split off the fund price because the price was too expensive and they wanted to reduce the price so that new investors will feel “affordable” to buy. This is the common practice of fund houses. Instead of educating investors and the general public about these basic price concepts, they also make use of the investor’s ignorance to continue to use unit-split measures to cut prices and attempt to lure new investors to come in. I believe there will be a lot of fund investors in the near future to buy into this fund. Not because of its favorable investment prospects, but because it is “cheaper” to buy. It was used to be RM 1.8931 to buy a unit, now it only costs RM 0.6299 to buy a unit, don’t you think this is an excellent bargain? Why can’t we rush in?

Buying Unit Trust or Buying Meat

Investors must first figure out whether they are buying “unit trust” or buying a loaf of “meat”?  The purpose to buy a unit of a particular fund is to sell it at a higher price later on. This is the so-called buy low and sell high. This is the basic principle of profit-making investment. We are doing a business. When we invest in a fund, we are dealing with fund house directly, not wrestling with the stock market investors. The daily unit price of the fund is determined by the overall prices from all the stock the fund has purchased. It is not determined, nor influenced by buying and selling of fund investors. This is the greatest difference between the fund’s price and the stock’s price.

If you buy a loaf of “meat” from supermarket, the purpose is to eat it. It will be consumed in our stomach, digested, and there it will be gone! How much energy it will generate to our body, no one really knows. So when we buy a loaf of meat, we need to buy it cheap, it will be cost-effective.

On the other hand, the purchase of a fund is completely in a different situation. It belongs to the field of investment. The so-called investment is an operation of trading… buying something and selling it later for a profit. The reason why we invest in a fund is because we think it is profitable to invest. Its fundamental value in the future will increase, and the unit price of the fund will surely reflect its underlying value by the increase in proportion. Therefore, our buying price now will certainly be lower than the future price. This is so called buy low now, then sell high later, the difference will be the profit. It is that simple.

Therefore, even if the current fund price is at RM2.0000 a unit, when we buy into it, it will surely become (say) RM2.5000. When we sell it there and then, we would have made a profit of 25%! If the current purchase price is (say) RM 0.2000, the future price will rise to RM 0. 2500 as well. If sold, we would also make 25% profit. Therefore, there is no such thing as fund price too expensive and too cheap to buy. The value of a fund (cheap or expensive) is not reflected in the unit price, but rather in the fundamental value or potential rise or fall of the asset where the fund is invested. Or rather, we should call the price of a unit trust whether it is low or high, rather than expensive or cheap.  The former is used in the arena of a stock market while the latter is used in the food market.

Another promotional strategy fund houses most often use is dividend distribution. They normally make public declaration of such event. They seem to announce as a good news. In fact, fund houses often make use the ignorance of fund investors in the event of distribution of dividends. Out of which they can harvest two benefits.

The first is to make the present unit holders feel happy because of so called “dividend” will be paid. Secondly, the fund’s price will fall once the Ex-Date of the dividend arrives. If the dividend distribution rate is 8%, the price will be “dropped” by 8%. New investors would see the price dropped “cheaper” by 8%. And they would feel “cheaper” to buy it now.  Many ignorant investors will be lured in to buy. Not because the fund has implemented on a very strategic investment plan, but simply because the price is cheaper now! So fund houses will not only retain existing investors, but also attract new investors (or rather “trick” new investors to come in).

In fact, I personally do not like these measures. I do not desire dividend paid out by any fund I invested in. Because we as retail investors would not have any benefit at all. It would have the same eventuality for unit split measure. I even perceive such practice can be more harmful to investors then benefiting anybody. Because when they do, our fund prices will fall and the performance of our portfolio will temporarily drop until the fund house distribute our deserved unit into our portfolio. Only then, our fund portfolio will resume normal appearance.

More Harm than Good

It usually takes around a month for such unit distribution. Some less efficient fund house can even take much longer than that. Recently, a few fund units from a strange fund suddenly appeared in my fund platform. When I went to check around, I realized I was receiving a dividend payout. These units were distributed from a fund that I once owed 6 months ago. But I had already switched it over to other fund five months ago. As a result, that sudden appearance of such few units in my account, which was not enough to meet the minimum unit amount legitimate to switch out, I will have to take painful effort and several troublesome steps to fork it out. This is not the first incident that came to me, I personally feel this is not a pleasant interruption.

Secondly, we as investors, our investment freedom of fund maneuvers are temporarily frozen because of the distribution of dividends. If you see a better chance arising, or a better fund appearing, you cannot do switching as convenient as it used to be. In the event while we are waiting for the dividend, the stock market crashes, our investment will definitely suffer!

Of course, some readers will reason it out that this is so because you propose constant or active fund switching as your unit trust investment strategy. If you were a long-term investor there will not be any such predicament. This reason is definitely correct. However, please do not feel complacent yet. You will not benefit at all even if you are not in this predicament. Once an experienced fund investor described fund dividend as the fund house is cutting your own meat to feed yourself. I think there is no way better than this description!

Therefore, as a retail fund investor, we must understand our own investment situation and should not blindly follow advice from fund houses or the “professionals” they trained. Of course, fund houses would wish that we refrain from doing fund switching. Because this will make their fund capitals unstable. Too many investors withdraw their investment funds together at one time will certainly have an impact on their operations. But as retail investors, we must also protect our capitals. This is the first and foremost important aspect of investment. Once our interests are threatened, no one will be there to think for us for our fund protection, except we ourselves!

 

 

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4 thoughts on “Buying “Unit Trust” or Buying “Meat”

  1. Haha, good one.
    That is why I use “current profit to paid dividend” ratio to judge whether should I continue to invest in certain fund.
    If the ratio is more than 2, then it is more profitable to invest.

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  2. Agreed on Fundsupermart platform. I tried to switch fund or sell out but they advise to transfer to cash management fund then switch to others…my UT is not performing well..small units only..

    Like

    1. If you are long term investor, intended to come back to invest, it is advisable to switch from equity fund to lower tier fund like bond fund or money market. In a way, you will earn credit point for your account. For the next investment for the same fund, you will not need to pay another sale charge when you switch your fund from lower tier fund to equity fund next time. I hope you will learn how to maximize FSM platform for your ultimate advantage.

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