2.4 Benefits and Disadvantages of Investing in UTS and PRS

The Benefits

1. Diversification

A larger pool lets the manager buy many investments, so investors gain the portfolio effect: the more holdings, the less volatile the returns. An equity scheme typically holds 20–100 counters. Some schemes also diversify across asset classes (shares, fixed income, property, cash), which adds stability in a falling stock market and liquidity for repurchases.

The study guide's illustration with RM10,000:

Even if Y and Z had not moved, the diversified portfolio would be worth RM4,000 + RM3,000 + RM2,000 = RM9,000, a 10% fall instead of 20%.

2. Valuation and liquidity

Liquidity is how quickly an investment can be sold. Schemes are liquid because:

• Scheme Providers must value the fund regularly and at least on every dealing day, objectively and verifiably;
• they are obliged to repurchase units when asked; and
• SC Guidelines require repurchase proceeds to be paid as soon as possible, and at most within 7 business days of receiving the request.

3. Professional management

Investors hand the work of research and monitoring to trained fund managers backed by research resources and an oversight arrangement that sets and monitors investment policy. Every unit holder benefits equally, whatever the size of their holding.

4. Investment exposure and lower costs

A person with RM1,000 cannot buy real estate, foreign shares or corporate bonds directly, but can through a scheme. Managers also pay lower transaction costs (economies of scale), access institutional rates of return, and often receive preferential IPO allocations.

5. Affordability and ease of purchase

The study guide says investors can start with as little as RM10. Buying is simple: contact a Distributor, obtain the prospectus or disclosure document and apply.

6. Meeting long-term needs

Typical long-term goals are a home purchase or overseas holiday, children's education, and a retirement fund to complement EPF.

7. Dollar cost averaging

Regular fixed-amount investing lowers the average unit cost (section 2.3).

The Disadvantages

1. Loss of control

Investors cannot direct how their money is invested. If the manager follows the prospectus and deed, there is little an investor can do about decisions they disagree with.

2. Fees and charges

Fees reduce returns: if two schemes perform the same, the one with lower fees produces the better net return.

3. Opportunity cost

An investor might have done better investing directly; the difference is the opportunity cost. But direct investors often forget the risk they took to earn that return: a single direct holding may beat a scheme, but with far more risk than a diversified scheme.

Putting It Together

Consultants should present both columns. Over-selling the benefits without the costs and risks is a common source of complaints (Chapter 4).

Applying It: Two Client Conversations

Scenario 1 – the "I can do better myself" client. Encik Hafiz says his friend made 40% last year on a single small-cap stock, while his equity fund made 9%. The Consultant can acknowledge the opportunity cost argument but should explain the risk side: the friend's whole return depended on one company, and a single-stock investor can lose most of the capital if that company fails. The fund's 9% came from a portfolio of perhaps 50 counters, so a single failure would have had a far smaller effect. The fair comparison is return for the risk taken, not raw return alone.

Scenario 2 – the short-term trader. Puan Lim wants to buy an equity fund with a 5% sales charge and sell it in three months if the market rises. The Consultant should point out that the direct charge alone means the fund has to rise more than 5% before she breaks even, while indirect charges keep accruing in the NAV. Schemes with entry charges suit medium- to long-term holding periods, and frequent buying and selling erodes capital.

Quick Revision List

• Benefits (study guide Diagram 2.6): diversification; valuation and liquidity; professional management; investment exposure and lower costs; affordability and ease of purchase; meeting long-term needs; dollar cost averaging.
• Disadvantages: loss of control; fees and charges (direct and indirect); opportunity cost.
• Numbers to remember: 20–100 counters in a typical equity scheme; repurchase proceeds within 7 business days; investing can start from RM10.