1.2 Investment-Linked Funds Are Not UTS; Industry Growth and History

Why This Comparison Is Tested

Consultants often meet investors who hold, or are being offered, an investment-linked insurance policy. FIMM wants Consultants to understand that these products look similar to UTS but are legally and regulatorily different, and to explain that difference.

How an Investment-Linked Fund Works

The study guide describes the mechanics as follows:

1. The policyholder buys a life insurance policy that represents a number of units in an investment pool managed by the life insurer.
2. The policy can be bought with a single premium (like a lump sum) or regular premiums (like a unit trust regular savings plan).
3. Premiums less the cost of life cover and entry fees are allocated, at the policyholder's direction, to one or more investment pools, each with its own objective.
4. Each pool is divided into equal units. A policy's value is units held × unit price.
5. Units have a buy price and a sell price: net premiums buy units at the pool's selling price, and on surrender units are cashed in at the pool's buying price.
6. Investment management fees and other charges are deducted from the pool.
7. Pool returns are taxed at the life insurer's rate, and a provision for tax on unrealised gains is deducted before unit prices are set.

The most important sentence for the exam: investment-linked funds are not monitored by a Trustee, are not scrutinised by the SC and are not subject to the SC's disclosure rules. They fall under Bank Negara Malaysia (BNM). Investors must be told about this difference.

FIMM's own practice question asks whether investment-linked funds that invest in capital market products must comply with the SC's regulations. The answer is false: they follow BNM's rules.

Size and Growth of the Industry

The study guide makes three points:

• Fund management has been the fastest-growing part of Malaysia's capital market over the last decade.
• UTS and wholesale funds have been the main drivers of that growth.
• The introduction of PRS added another option for investors saving for retirement.

The SC publishes up-to-date statistics on fund size and sources of funds on its "fund management products" analytics page. The FCE does not expect you to memorise current ringgit totals, which change constantly.

Milestones in the Development of CIS

Malaysia introduced unit trusts early compared with its neighbours, yet there was no regulation until 1991. After 1996 the focus was on developing UTS so that retail investors could take part in the stock market through professionally managed funds. In the 1990s many retail investors traded on rumours, which added to market volatility. Pooling their money under professional managers, and raising the share of institutional investors who could push for good corporate governance, were seen as ways to reduce that volatility.

PRS arrived in 2012 to tackle the adequacy of retirement savings as the population ages. It complements the mandatory EPF scheme and forms the third pillar of the World Bank's multi-pillar pension framework (Chapter 7B).

The Islamic Capital Market

The study guide also highlights the Islamic capital market (ICM), a segment of the wider capital market that complements Islamic banking, takaful and the Islamic money market. The SC has developed the ICM on two fronts:

1. building the supporting infrastructure; and
2. widening the range of Islamic products.

The ICM's growth has broadened the capital market and the financial services industry generally. Shariah-compliant UTS and PRS are covered in Chapter 2 and Chapter 7A of this guide.