Overview Of The Unit Trust Industry In Malaysia Finance Essay

In general, a unit trust is a corporate investing program where the money or capitals invested by the investors are combined into a lawfully formed trust fund. The money is managed by the professional fund directors moving on behalf of the investors. Unit rust investing offers sensible sum of return with minimum hazard. It is managed by qualified direction squad at minimum cost, minimising, liquidness and capital grasp.

The money received will be pooled and to be invested in a individual diversified investing portfolio which consists of stocks, bond, money market instruments, belongingss and others in line with the fund ‘s investing aim. Unit of measurement trusts are designed to supply an chance for persons to put comparatively little sums of money in a diversified portfolio. There are several general manageA¬≠ment groups such as PNB which manage a big figure of unit trust financess created for a assortment of different intents and which offer specializer financess for investing overseas or in peculiar sectors or markets. Some of these have a specific spirit, such as environmental or cultural content. Besides the assorted types of direction group, unit trusts differ in their investing aims. A figure of classs are publicized and an indicant of the scope of fortes

Despite high returns by making direct investing in the stock market, it is exposed to high grade of hazard. Furthermore, it requires considerable sum of clip, cognition and expertness to put in the stock market and necessitate broad scope of fiscal and investing research and analysis, up-to-date economic studies and statistics, a defined and planned investing scheme and a good sense of timing. On top of that, a batch of clip is spent later in supervising the investing, measuring its public presentation and from clip to clip make up one’s minding whether to alter your portfolio of investing with every new corporate development or alteration in the market and economic status. As such, the full hurdlings can be avoided by puting in the unit trust as it offers a more convenient and simpler method of puting than direct investing as the issue of choosing investing instrument being managed by the professionals. The professional will supervise the market trends closely and to guarantee the investing bring good returns to the investors.

Unit Trust may non be a channel burying rich rapidly, but investings in them are long-run growing avenues with many advantages merely mentioned. In short, major advantages of investing through Unit Trust are:

economic systems of graduated table of operations,

spread of hazard,

expert and professional direction,

variegation of portfolio,

freedom from housework,

low securities firm and minutess costs, and

good portfolio public presentation.

However, there are besides some of disadvantages of puting in units trust as follows: –

burden fee – gross revenues charge when the unit is sold

high one-year disbursal – the direction fees is really expensive

dealing cost – direction companies incur high disbursals in buying big block of investing instrument.

The administrative charges and legal costs which will take down the monetary value at which units will be bought and raise the monetary value at which units will be sold. Directors normally have some discretion in the method of ciphering the monetary value of units so that like the bid/offer citation of the stock market, the bid/offer monetary values of the unit trust will reflect the positions and current stock place of the direction. The command monetary values will normally differ by approximately 5 % to 7 % from the offer monetary values.

Many unit trusts besides offer accessory services such as:

salvaging strategies for regular monthly investing in units,

some life insurance strategy whereby investing in units is linked to the regular, monthly or quarterly payment of premiums on a life policy,

a portion exchange strategy,

a personal loan strategy, and

an automatic reinvestment of income distributions.

OVERVIEW OF UNIT TRUST INDUSTRY IN MALAYSIA

In Malaysia, unit trust industry started early in 1959 when the first unit trust named Malaysian Unit Trust managed by Malayan Unit Trust Limited was introduced. In 1963, the Malayan Unit Trust was transferred to the South East Asia Development Corporation Berhad. Later, the Singapore Unit Trust Limited and Asia Unit Trust Berhad were as a consequence of separation from this company.

In 1968, Amanah Saham MARA Unit Trust Management was established in 1968. The fund aimed to pool bumiputra nest eggs, chiefly from the rural countries. The debut of the financess was so encouraging during that twelvemonth. Amanah Saham MARA Unit Trust Management Berhad and Asia Unit Trust Berhad mostly dominated the industry back in 1970 ‘s.

The enlargement continued on April 20, 1981 when Permodalan Nasional Berhad ( PNB ) foremost introduces Sekim Amanah Saham Nasional. It was aimed to mobilise the nest eggs and increase the corporate wealth of the bumiputra as harmonizing to the New Economic Policy. The fund from the unit trusts was mostly invested into the assorted companies ran by bumiputra. As a consequence of this, PNB managed to pull about 170,000 of bumiputra to take part, merely a hebdomad after it was launched. A hebdomad after that, approximately 1 million bumiputra invested in the Amanah Saham Nasional which worth RM600 million. This is a record for the unit trust industry since its constitution. Subsequently, the authorities believed unit trust could be a powerful tool to get rid of economic differences among races.

The growing in economic system in 1990s as a consequence of turning per capita income, new international ventures, corporatization, lifting consumer richness, dining stock market and such reflects a greater highs of growing for unit trust industry.

The authorities is really concerns about the growing and development of the industry. So, they introduced several regulative models and organic structure to supervise the industry. Securities Commission ( SC ) was established in March 1, 1993 as a regulative bureau to supervise all the unit trust dealing within the market. Among their function is to apologize and beef up the disconnected regulative model in the industry

Diagram 1

ORGANISATION OF UNIT TRUST/MUTUAL FUNDS

Common financess have a typical organisation in which cardinal parties or participants or particular organic structures or components are involved. They are:

Trust Deed

Trust Deed involve the understanding that connect 3 chief parties viz. the Unit Trust Management companies, the legal guardian and the unit trust fund ‘s investors ( unit holders ) to the title. This understanding demand to be registered with the Securities Commission.

Trustee

A legal guardian is trusty establishments appointed by the title of trust to guarantee the involvement of unit holder is being safe guard. In add-on, the legal guardian is besides require to guarantee the direction company will follow with ordinance set by Securities Commission guidelines on Unit Trust Funds and Securities Commission ( Unit Trust Scheme ) Regulations 1996.The legal guardian is besides to guarantee that the fund directors will merely put the fund based on the trust title. The legal guardian can be the Public legal guardian of Malaysia or any independent legal guardian of Malaysia or any independent legal guardian companies.

Management Company

The Management Company is the booster of the hub to the public and provides investing expertness to pull off the fund and responsible to guarantee the fund being invested based on its aim. The direction company besides advertises the sale of units, although the footings and claims made in the advertizement are monitored by the legal guardian to guarantee that no deceptive information is given to the puting populace. There are units which are non allowed to publicize, and these may be formed for specialist investing or for a group of private investors wishing to pool their resources. To separate between the types of unit trust, the term authorized is used in regard of those trusts whose activities have been authorized by the Department of Trade and Industry. Authorization involves credence of restraints on investing policy as respects the concentration of assets in one investing or the type of plus held.

Investors or Unit holders

The Investors is the 1 who purchase the trust or supply the capital to the trust. The investors are anticipating the return from their investing in the trust. Once they purchase the trust, they can besides sell the trusts back to the direction company.

In general, the investors of unit trust consist of retail investors who are have limited clip and cognition know how to put straight into investing portfolio. A portion from that, the investors besides consist of for those looking for long footings investing for future demand i.e. during retirement as unit trust is considered save investing with good return.

MODUS OPERANDI OF UNIT TRUST

A unit trust fund works by pooling the fiscal resources of single or institutional investors for the intent of doing large-scale investings in a selected portfolio of Permitted Investments. The followers is the modus operandi of unit trust.

1.

The investor reads the Prospectus, completes the application signifier and returns it with his / her application money.

2.

The Trustee receives the investor ‘s money, pools it with other investors ‘ money and

purchases investings selected by the Manager. The Manager issues statements of investing to investors demoing the figure of units purchased in the Fund.

3.

The Manager looks after the daily direction and disposal of the Fund ‘s investings to guarantee optimum returns.

4.

The Fund ‘s investings are valued day-to-day and the capital growing achieved is passed on to the investors through an addition in the value of units.

The Trustee distributes net incomes from the Fund yearly through hard currency dividends and/or by publishing extra units to investors.

The investors receive the hard currency dividends or if he/she so decides to construct up his/her investing, he/she can utilize the dividends to buy extra units in the Fund.

The Parties Involved In a Unit Trust Agreement

The tri-partite relationship between the Manager, the Trustee and the Unit holder is lawfully bound by the footings and conditions specified in the Trust Deed.

The chief legislative organic structure regulating the constitution, operation and disposal of unit trust financess is the Securities Commission ( SC ) .

Federation of Malaysian Unit Trust Managers ( FMUTM ) handles enrollment of individuals covering in unit trusts. For more information, please refer to www.fmutm.com.my.

The chief Torahs and ordinances that govern the unit trust industry are the Securities Commission Act 1993, the Securities Commission Guidelines on Unit Trust Fundss and the Securities Commission ( Unit Trust Scheme ) Regulations 1996.

The other government legislative assemblies are the Securities Industry Act 1983, the Companies Act 1965 and the Futures Industry Act 1993.

TYPES OF UNIT TRUST Fundss

There are 2 types of unit trust direction the managed and unmanaged companies. The managed company consists of Open-end Management and Closed terminal Management company severally. Meanwhile, the unmanaged company is known as Unit Investment Unit of measurement

Open-End Fund

Open End fund is besides known as common financess. This type of unit trust is the most popular signifier of Management Company among the investor. The name of unfastened terminal is derived from their modus operandi that allows the proprietor of the trust to sell the portions back to the company at any clip required. The figure of units can be created by the direction company to run into the demand. The Open terminal is lawfully obliged to purchase back the portions.

The monetary value of the unit is non determined by the normal portion monetary value which is based on supply and demand but based on Net Asset Value ( NAV ) which is calculated on day-to-day footing.

The followers is how the computation of NAV is been done.

NAV is determined by taking the entire market value of all investing held by the fund less any liabilities and divided by the figure of units on issue.

NAV = Value of Assets – Liabilitiess

_________________________

No of units outstanding

Example

A unit trust company issued 300 million units at RM1.0 each. After several months, it was to the full subscribed by all the investors. The director of the financess plan to segregate the investing into 70 % on stocks, 15 % on bonds and the staying money of 15 % to be invested in the money market.

After one twelvemonth, the returns obtained from the investing are as follows: –

Shares – 18 % , Bond – 13 % and money market -8 % . What is the new NAV

300 million units @ 1.00 = RM300.0 million available for investing

Investing

Stock market – 70 % of RM300m = RM210m

Bonds – 15 % of RM300m = RM45m

Money market- 15 % of RM300m = RM45m

________

Entire Investment RM300m

________

Tax return after one twelvemonth

Stock market – 18 % of RM210m = RM37.8m

Bonds – 13 % of RM45m = RM5.85m

Money market- 8 % of RM45m = RM3.6m

________

Entire RM47.25

________

NAV = Value of Assets – Liabilitiess

_________________________

No of units outstanding

RM300m + RM47.25

= __________________

300 m

= RM1.16

Note: – Monetary value of unit trust fund is based on the NAV. Nevertheless, the highest monetary value that can be sold is 10 % above the NAV. Meanwhile the lowest monetary value that can be sold is 5 cents below NAV. Fund Manager is allowable to find the monetary value to be sold within the scope.

Closed- End Fund

This type of fund was introduced on November 1995 when SC released the guidelines for the Public Offering of Securities of Close- terminal financess.

Closed-end fund is different from opened-end fund as the monetary value of the fund is non based on the NAV. Closed terminal fund is a company which its rule concern activities of investing based. The Management Company will roll up financess from the populace through IPO and use the fund by puting in the stock market. It is called closed-end fund because it issued a preset figure of portions during the peculiar period ( during IPO ) and will non purchase back the units from the populace. As a consequence, the unit holders will merely be allowed to purchase or sell the portions through a accredited agent which usually the remisier. As such, the monetary value of closed terminal fund will be depending on the supply and demand as other portions listed on Bursa Malaysia such viz. Maybank, Air Asia, RHB Bank and others.

CATEGORIES UNIT TRUST Fundss

Equity Fundss

These financess chiefly invest in the stock market. Equity financess expected to offer a high output of return nevertheless its expose high degree of hazard. The illustrations of Fundss that are categorized under equity financess are Growth and Index financess severally.

Income Fundss

The choice of investing instrument is merely focusing towards fixed income securities that offering high dividend output. In general, these financess have lower hazard as compared to equity fund and the investors of these financess are expected to gain annually dividend.

Balanced Fundss

As reflected by the fund ‘s name, Balance Funds is offering a combination return of both current income and long term capital additions. These financess will put on both investing instrument of equity and fixed income portions. The portfolio of investing will include bonds, preferable portions and ordinary portions. This fund is suited for those who prefer tolerable mean hazard.

Growth fund

The investors that purchased these financess are expected to gain capital addition and long term growing on their investing. These financess are really improbable to give good dividend output as the money needs to spread out the concern for long footings prospect.

Aggressive growing Fund

This is extremely bad and seeks significant return from capital additions. These Fundss will choose little capital stock that have high chance for long term growing. In add-on, the choice of stock will besides include under value stock i.e. low P/E ratio as compared to the industry norm. In general, this fund is more hazardous that normal growing fund.

Chemical bond Fundss

This fund is merely invested in fixed income /debt instrument viz. bond. Therefore is offer fixed degree of current income. These financess are considered really safe / low hazard but the return is besides really low in concurrence with the hazard.

Muslim Fundss

This fund is merely allowed to put in portions which comply with shariah rules. As such, any stocks that violate shariah rules i.e. involved in involvement, chancing, spirits etc is non permitted to be invested.

ISLAMIC UNIT TRUST

The Islamic unit trust strategies are corporate investing financess which offer investors the chance to put in a diversified portfolio of Shariah-compliant securities which are managed by professional directors in conformity with the Shariah. The trusts are offering similar classs of fund as conventional financess i.e. growing, balance, income and etc

The lone difference is that Islamic Unit Trust merely invests in companies that are in conformity with the Shariah rules as outlined by the Shariah Advisory Council ( SAC ) of the Malaysian Securities Commission. The Islamic unit trust strategies are required to name a Shariah commission or Shariah advisor to guarantee that their operations are in conformity with Shariah rules.

Like all the other non-Islamic Fundss in Malaysia, Shariah Funds are regulated by the Securities Commission and placed under the same stringent regulative standards.

The chief aim of an Islamic Unit Trust is to put in a portfolio of “ halal ” stocks which comply with the rules of The Syariah. Such “ halal ” stocks will except companies involved in activities, merchandises or services related to conventional banking, insurance and fiscal services, chancing, alcoholic drinks and non-halal nutrient merchandises.

The securities that are excluded from:

Financial services based on riba ( involvement )

Gambling

Industry or sale of non-halal merchandises or related merchandises

Conventional insurance

Entertainment activities that are non-permissible harmonizing to Shariah

Industry or sale of tobacco-based merchandises or related to Shariah

Strockbroking or portion trading in Shariah non-approved securities

Other activities deemed non-permissible harmonizing to Shariah

Diagram 2

Shariah Compliance Shares

Islamic unit trust is merely invested in Shariah conformity securities which the listing of the companies is issued and updated by Shariah Advisory Council ( SAC ) twice a twelvemonth viz. in May and November severally. Please refer to the web site of Secuties Commision on the list of Shariah conformity companies.

Pouch uses both qualitative and quantitative attack in sorting the securities from clip to clip.

Qualitative Approach

Once the company is involved in the non conformity sharia law activities, automatically the company will be included as the Shariah conformity portions. The list of nucleus non Shariah conformity activities are as follows:

Financial services based on riba ( involvement )

Gambling

Industry or sale of non-halal merchandises or related merchandises

Conventional insurance

Entertainment activities that are non-permissible harmonizing to Shariah

Industry or sale of tobacco-based merchandises or related to Shariah

Strockbroking or portion trading in Shariah non-approved securities

Other activities deemed non-permissible harmonizing to Shariah

Quantitative Approach

Besides qualitative attack, SAC besides uses quantitative attack in finding sharia law conformity stock. This is applicable on assorted companies which are defined by SAC as holding both activities of allowable and non allowable by sharia law.

Under this attack, SAC is using the construct of maximal benchmarks is its afford to sort the halalness of the underlying assorted companies ( Securities Commission 2007 )

The 5 % benchmark

The maximal benchmark is used to measure the degree of assorted part from prohibition activities i.e. riba, gaming, liquar and porc

If the company ‘s gross revenues from the above activities are less than 5 % of the entire company ‘s turnover/sales, it considered as sharia law Compliance Company.

The 10 % benchmark

The maximal benchmark is used to measure the degree of assorted part from involvement income earned from investing made in the convention fiscal establishment i.e. fixed sedimentation and besides parts received from assorted companies from baccy related activities

If the company ‘s gross revenues from the above activities are less than 10 % of the entire company ‘s turnover/sales, it considered as sharia law Compliance Company.

The 20 % benchmark

This maximal benchmark is used to entree the degree of parts from assorted companies that activities related to rental payment received from the premised used in the non conformity sharia law activities i.e. gaming, spirits etc.

If the company ‘s gross revenues from the above activities are less than 20 % of the entire company ‘s turnover/sales, it considered as sharia law Compliance Company.

The 25 % benchmark

This maximal benchmark is used to entree the degree of parts from assorted companies that activities related to hotel and resort, portions trading, portion broking and others that are deemed as non permissible to the sharia law.

If the company ‘s gross revenues from the above activities are less than 25 % of the entire company ‘s turnover/sales, it considered as sharia law Compliance Company.

Illustration for finding the position of Shariah Compliance Company[ 1 ]

Group A Group B

( RM million ) ( RM million )

Group Turnover 300 150

Subsidiary ‘s Employee turnover

– spirits 3 0

– porc related 15 0

– gaming 0 0

– Interest income 0 16.5

– Hotel Business 10 0

– Stock Broking 50 0

Status of the company

Group A Group B

( RM million ) ( RM million )

Group Turnover 300 150

Subsidiary ‘s Employee turnover

– spirits 3 0

– porc related 15 0

– gaming 0 0

— – — – 18 0

Company A = 18/300 @ 6 % Company B = 0/150 @ 0 %

– Interest income 0 16.5

Company A = 0/300 @ 0 % Company B = 16.5/150 @ 11 %

– Hotel Business 10 0

– Stock Broking 50 0

Company A = 60/300 @ 20 % Company B = 0/150 @ 0 %

Based on the above, company A breach the 5 % benchmark for riba, spirits and porc but still below 25 % for concern assorted companies activities related to hotel and resort, portions trading, portion broking. – Not shariah conformity

Company B breach the 10 % benchmark for involvement – Not shariah conformity

JUSTIFICATIONS OF UNIT TRUSTS ACCORDING TO SHARIAH RULINGS

In Islam, investing under the unit trust construct is in line with the sharia law regulation. The construct of hazards and wagess shared by the unitholders using the expertness of professional directors conforms to Islamic Principles and already being applied in within the Islamic Financial System. This can be related to specific fiscal contracts and merchandises viz. Murabaha and Musharakah.

First, it comply the construct of Mudaraba. This construct is one of well-known investings allowable under Islamic Islamic law and widely used by the state rehearsing Islamic system of banking such as Iraq. Generally, Murabaha is a construct in net income sharing where capital and one party is supplying labour. Then, the other party will move to pull off the money. The net income is shared by both parties harmonizing to the agreed ratio this construct can be implied to the unit trust. In unit trust, the capital of a venture is provided by the Trust and the concern expertness and direction will be responsible for the 3rd party, in this instance a unitholders. Then, the net income is divided between the unitholders and the trust as harmonizing to the understanding. In add-on to this, some alone elements of Mudaraha construct are it is limited to the ego neutralizing transasctions, the assets must be easy recognizable and must be realised and liquidated so that the net incomes are easy distributed and its histories must be recorded decently and be audited.

Next, the construct of Musharaka besides can be applied in the unit trust. Within this construct, two or more moneymans will engaged in a new undertaking or take part in an established undertaking. All the spouses have a right to portion entire net incomes from a venture as in the understanding. The directors who manage a fund will be remunerated in the signifier of service charge. This is in line the unit trust construct, in which the mechanisms are the same. The chief difference is chiefly the avenue of the financess ; where the financess are being invested. In Islamic Unit Trust for illustration, the financess are allocated in the authorized investings approved by the Security Commission every bit good as the Shariah Board. In add-on to this, the net income is shared after subtracting direction fees and payment for zakat.