CATEGORIES OF UNIT TRUST FUNDS

Following is a brief description of various categories of unit trust funds:

Equity Fund

An equity fund is defined as a unit trust fund that invests primarily in shares/stocks. Such fund is typically held either in stock or cash, as opposed to Bonds, notes, or other securities. This may be a mutual fund or exchange-traded fund. The objective of an equity fund is long-term growth through capital appreciation, although income distributions and interest are also sources of revenue. Specific equity funds may focus on a certain sector of the market or may be geared toward a certain level of risk.

Stock funds can be distinguished by several properties. Funds may have a specific style, for example, value or growth. Funds may invest in solely the securities from one country, or from many countries. Funds may focus on some size of company, that is, small-cap, large-cap, et cetera.

 

Balanced Fund

A balanced fund is a unit trust fund that invests in a balanced mix of shares/stocks and debentures to provide both income and capital appreciation while avoiding excessive risk. It is suitable for investors who are looking for a mixture of safety, income and modest capital appreciation. The purpose of balanced funds is to provide investors with a single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss; the flip side, of course, is that balanced funds will usually increase less than an all-stock fund during a bull market.

 

Bond/Fixed Income Funds

A bond fund pools money from many investors to buy individual bonds and other debt instruments that meet the fund's investment objective. Each bond fund is professionally managed, and is categorized based on the type of bonds in which it invests. Its investment might include government, corporate, municipal and convertible bonds, along with other debt securities like mortgage-backed securities.

 

Index Funds

An index fund or index tracker is a collective investment scheme (usually a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. Some of the advantages of index fund include to provide broad market exposure, low operating expenses and low portfolio turnover.

Tracking can be achieved by trying to hold all of the securities in the index, in the same proportions as the index. Other methods include statistically sampling the market and holding "representative" securities. Many index funds rely on a computer model with little or no human input in the decision as to which securities are purchased or sold and is therefore a form of passive management.

The lack of active management (stock picking and market timing) usually gives the advantage of lower fees and lower taxes in taxable accounts. However, the fees will generally reduce the return to the investor relative to the index. In addition it is usually impossible to precisely mirror the index as the models for sampling and mirroring, by their nature, cannot be 100% accurate. The difference between the index performance and the fund performance is known as the 'tracking error' or informally 'jitter'.

 

Money Market Fund

A money market fund is one which invests primarily in short-term debentures, short-term money market instruments and placement in short-term deposits. The main goal is the preservation of principal, accompanied by modest income distributions. Money market funds are very liquid investments, and therefore are often used by financial institutions to store money that is not currently invested. Unlike bank accounts and money market accounts, most deposits are not insured, but the risk is extremely low. Although money market mutual funds are among the safest types of mutual funds, it still is possible for money market funds to fail, but it is unlikely. In fact, the biggest risk involved in investing in money market funds is the risk that inflation will outpace the funds' returns, thereby eroding the purchasing power of the investor's money.

 

Fund-Of-Funds

A Fund-of-Funds is an investment fund that uses an investment strategy of holding a portfolio of other investment funds rather than investing directly in shares, bonds or other securities. This type of investing is often referred to as multi-manager investment.

The fund’s property should only consist of units/shares in other collective investment schemes. A management company, or its fund management delegate, must ensure that the investments in other collective investment schemes comply with the SC guidelines.

A Fund-of-Funds must not invest in:
(a) a Fund-of-Funds;
(b) a Feeder Fund; and
(c) any sub-fund of an umbrella scheme which is a Fund-of-Funds or a Feeder Fund.

For a Fund-of-Funds that invests in a sub-fund of an umbrella scheme, the sub-fund of the umbrella scheme should be treated as if it is a separate collective investment scheme.

 

Feeder Fund

Feeder fund is an investment fund which does almost all of its investments through another fund (called the master fund) via a Master-feeder relationship. The master-feeder structure allows asset managers to capture the efficiencies of larger pools of assets, see economies of scale although fashioning investment funds to separate market niches.

One or more investment vehicles pool their portfolio within another vehicle -- i.e. there are several smaller feeder funds and one master to which they contribute.

Sometimes, especially when the feeders are hedge funds, this is a way of complying with the distinct legal systems of distinct jurisdictions. In other words, there will be an onshore feeder and an offshore feeder to the same master portfolio.

This is also sometimes called the hub and spoke structure.

A Feeder fund is also similar to a fund-of-funds configuration, except that the master fund performs all the underlying investments.

A domestic feeder fund will usually invest in a foreign master fund to gain a tax advantage for the domestic investors.

 

Umbrella Fund

An umbrella fund is an investment term used to describe a collective investment scheme which is a single legal entity but has several distinct sub-funds, each of which invests in a different market or country. The umbrella fund structure makes it cheaper for savers to move from one sub-fund to another.

 

Capital Protected Fund

A capital protected fund is one whose primary objective is to protect and return investors’ capital at a pre-determined date in the future, with some returns (if any). This fund will try and protect the capital but there is no guarantee, which makes it different from a guaranteed fund.

 

Guaranteed Fund

A Guaranteed Fund is one which guarantees investors will get back the capital invested, with some returns (if any), or guarantees investors a certain investment return payable at a pre-determined date in the future. When you invest in a Capital Guaranteed Fund, it is guaranteed that you will not lose any money provided that you do not redeem your investment before the maturity date.

 

 

References:

1. Wikipedia. Wikimedia Foundation ( 07-01-2009 ). Retrieved on 07-01-2009.

2. InvestorWords.com. WebFinance, Inc( 12-02-2009 ). Retrieved on 12-02-2009.

3. Guidelines on Unit Trust Funds issued by Securities Commission Malaysia on March 3, 2008.