As a result of the general economic downturn, affecting both the equity and bond markets, 2008 is probably a year all unit trust managers would like to forget. As an example, here are the performance of some Malaysian balanced funds (a combination of equity and fixed income investment):
Source: http://www.signalinvest.com/personal/funds/price/For those of you who invest in unit trusts, you may perhaps be wondering if you should exit your investment, i.e., sell your units. Some may even believe it may be a good idea to sell now and buy back later when the unit prices have gone down even lower. But what should you do?
Basics of Unit Trust
Before we go on further, let’s try to understand the basics of investing in unit trusts. We’ll start with an example. Let’s say you invested RM1,000 in a balanced fund unit trust in December 2006. The purchase price at that time was RM0.50 per unit, thus giving you a total investment of 2,000 units.
One year later, in December 2007, the fund paid out a distribution (or dividend income) of RM0.10 per unit. Based on your initial holdings of 2,000 units, you will be entitled to RM200 of distribution. However, at the time of investment, you have stated that you would like to reinvest any distribution income. If the price of the unit trust in December 2007 was, say, RM0.60, you would receive your distribution in the form of additional 333 units (RM200 distribution income/RM0.60 per unit). As such, your total investment as at December 2007 was 2,333 units.
In December 2008, in line with the market conditions, the funds did not fare that well. No distribution income was declared for that year and the price has fallen from RM0.60 to RM0.45. If you decide to sell your units, you will receive RM1,049.85 (2,333 units x RM0.45 per unit). In this scenario, you will still get a total return of RM49.85 over 2 years, which translates to about 5%. However, on an annualised basis, the return is only 2.46% p.a. Effectively, this means you are better off putting you money in a 12 month fixed deposit earning you about 3.5% p.a. (which will gives you a total savings of RM1,071.22 at the end of two years).
To sell or to hold
Back to the question on whether you should sell your unit trust now since the outlook for 2009 is not too great. There is no hard and fast rules about this but in general, I personally think it’s too late to sell now. The market has fallen drastically in 2008 and the unit trust prices are at their lows now. Depending on the price you have bought your units, you are likely to suffer losses or much lower annualised returns (perhaps even lower than FD rates as illustrated in the example above). In other words, the damage has been done, if you sell now, you are simply recognising the losses immediately.
Another factor to consider is what type of funds you have invested in. Typically, unit trusts are designed for medium to long-term investments. This means the investment is for at least 3 to 5 years. You can find these basic information about the fund’s investment objectives and benchmarks in the prospectus, annual report or website. The fund managers generally take a strategy to buy and sell for the funds they manage. Over time, the returns and losses may smoothen out to give the long-term investors some form of return close to its stated objectives and benchmarks. If you bail out too soon, you are simply absorbing the short-term losses.
Continuing from the above example, let’s assume if the price of the unit trust has recovered to RM0.55 in December 2009. Holding on to your investment (instead of selling them in December 2008) means your investment will be worth RM1,283.15 (2,333 units x RM0.55 per unit) by then. This will give you an annualised return of 8.67%!
What about adopting the strategy of selling now and buying in later when the price of the unit trust has fallen further? This idea of selling high and buying low later is only great if the prices are still consider “high” at this point. Both the equity and bond markets had suffered significant losses last year that the prices of your unit trusts are more likely than not at their lows now. Nobody knows where the market is heading. Some are talking about a rally in 2009, others expect the market to get worse. If the market does not get worse, you will end up in a situation of selling low now and buying high later.
In conclusion, my advice is to hold on to your investment for now. If it makes you feel better, check the annualised return of your investment if you sell now. If you feel comfortable with the return and you think you have given up hope on your unit trust, then sell. Otherwise, if the return is already bad, what can you lose by holding on for a couple of years more? Most unit trusts are for long term anyway.
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