Understanding the types of Mutual Fund Investments


They are simple, yet powerful enough to determine your long-term success or failure as an investor.
Once you learn what they are, some of you may say that all three criteria are nothing more than common sense, and that would be true. Unfortunately, they aren’t common practice!
The three criteria for successful unit trust investing are Diversification, Proper Selection of Funds and Constant
Diversification means different things to different people. For many unit trust investors it simply means not putting all their economic eggs into one financial basket. Depending on the mindset of the people concerned, this could further translate into not putting all their money earmarked for investments into one particular fund or into a single asset class of unit trust funds or even into one unit trust management company.
The greatest benefit of diversification is reduction of investment risk.
It is vital to understand that investment returns are always a function of investment risk. Generally speaking, the
higher the sought after investment returns are, the higher the associated risks.
Therefore, you should understand the various classes of unit trust funds before investing. There are three broad asset classes based on risk.
The highest risk is associated with the Equity Class. Second is the Bond Class. And third and lowest is the Money Market Class.
The most basic question you must ask yourself when you decide to buy a particular unit trust fund is what asset class does it belong to: Is it an Equity, Bond or Money Market fund?
Now that you understand there are three broad classes of unit trust funds, how then do you diversify your investments?
Before you can make that decision, you must recognise there is more than one way to view diversification. For instance, you may diversify your investments into different classes of assets (‘asset diversification’) or into different funds within the same class of assets (‘fund diversification’).
By adopting the top-down approach to diversification, you should look at your overall asset allocation as the first step toward intelligent diversification. In other words, your first step should be ‘asset diversification’, more commonly referred to as asset allocation.
This decision is greatly dependent upon your risk profile, your key investment objective and your relevant investment time horizon. Only after you have decided on your asset allocation should you then decide upon your ‘fund diversification’.
According to a groundbreaking study by The Financial Analysts Journal, approximately 91.5% of a portfolio’s total returns depend on how you allocate your money among various asset classes, namely different types of stock, bond and money market investments. The bulk of the remaining 8.5% contribution toward total returns is dependent upon stock selection and market timing.
Your second step of diversification is ‘fund diversification’. Once you have determined your asset allocation, you should then select a few funds within each class of assets. However, if you aren’t investing a huge amount of money, it may not make sense to spread your resources too thinly by investing in too many funds within each asset class.
To take the guesswork out of this entire exercise, MAAKL MUTUAL have designed their very own MAAKL Dynamic Allocation Models (DAM) to help their clients allocate their assets. Within their MAAKL DAM there are two different models. The first is what we call our Time-based Portfolio Model (TPM) and the second their Objective-based Portfolio Model (OPM).
TPM is suitable for investments that are time-critical. For example, if an investor plans to build a higher education fund for his child then time is obviously a critical issue. The child needs to enter university in a particular year! Therefore, our hypothetical investor will need the money at a certain time.
What our TPM guides him to are progressively lower risk asset mixes as the time for the child’s university entrance, possibly overseas, draws nearer.
OPM is suitable for investors who are very clear with their investment objectives and for whom time is not a critical issue.
For example, an investor who has no concerns at all about his children’s tertiary education and his own retirement,
probably because both those goals are already fully funded, may simply want to accumulate more wealth by embarking upon a yield-enhancement exercise. This means that his OBJECTIVE is to gain higher returns through judicious unit trust investing than he is likely to get from fixed deposits or even EPF.
Within our wide array of asset allocation models, such an investor would focus his selection of funds based upon the dictates of our Balanced, Growth or Aggressive Growth Portfolios.

Do note that both the TPM and OPM are not static. By nature, they are dynamic models with their asset allocation
recommendations changing systematically based upon Malaysian stock market conditions.

Proper Selection of Funds

Once the very important diversification issue is taken care of, how exactly to choose appropriate funds becomes a
Often investors are lured into buying funds that have previously won awards. While it is understandable that award-winning funds are attractive by virtue of their pedigree, it really is very important for you to understand that yesterday’s fund performance winner may not be tomorrow’s champion.

Buying a fund simply because it has won an award is like betting on the horse that won the previous race.
Furthermore, even if you have selected an award-winning fund, it still doesn’t mean that your personal returns are going to be the same as that of the fund. Very few retail investors understand this subtle but very real situation: Even if you have invested in a fund which eventually becomes a winner that earns a whopping 24% return, let’s say, in one year, you still could end up earning much less if your timing is wrong.

It is sadly all too common to find investors who have been sold the wrong fund. This happens because the average retail investor is neither equipped nor inclined to properly analyse her investment objectives, risk profiles and investment time horizons. Without going through a systematic process, it becomes difficult to select the appropriate funds (as well as fund mix) that meet your unique needs.

Advisers must understand why it is conceivable that a small cap fund, for instance, which may have returned 35% the previous year, might really not be suitable for you.

Why might that be?

Well, such a fund is a high risk one and can be very volatile. This means you might suffer severe losses if you invest at the wrong time.
This situation could be further exacerbated if you’re a dyed-in-the-wool lump sum investor who has no intention (or additional resources) to average down during market troughs.
So, although past fund performances are the most common indicators used by the investment fraternity, do realise that looking solely at past performances is like driving by perpetually staring into your rear-view mirror!
What you need is useful, pertinent, trustworthy guidance that helps you – to some extent – to look forward intelligently.

Constant Monitoring

After taking care of the important issues of diversification and the proper selection of funds, it becomes crucial that an effective monitoring system is put in place to track the ups and downs of your portfolio.
The absence of such a system is the most common reason why many investors fail to do well in unit trust investing. The vast majority of Malaysian unit trust investors do not have access to such a system. Sadly, this is also true of most unit trust agents!
Nonetheless, most investors expect their agents or the banks that sold them their funds to also monitor those investments for them.
Unfortunately, this doesn’t happen very often.
One of the major contributing factors toward this shortcoming is the current incentive structure.
Without timely and relevant information on your investments, it is impossible for you to rebalance your portfolio or trim your equity exposure when you have achieved your interim or final targeted returns.
So for your own good, you should ensure that your unit trust advisers have ALL the necessary skills, tools and alert systems needed to track your portfolio’s performance and inform you once your targeted return is achieved.


The Information contained herein has been obtained and/or derived from sources believed to be reliable, the Company makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of this document. Investor should rely on their own evaluation to assess the merits and risk of the investment. In considering the investment or the information provided, investors who are in doubt as to the action to be taken should consult their professional adviser immediately.
This document is provided to you for information purposes only and should not be construed as and shall not form part of an offer or solicitation to buy or sell any unit trust. It may not be reproduced, distributed or published by any recipient for any purpose.

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