A Step-By-Step Guide To Build A Profitable Unit Trust Portfolio

A Step-By-Step Guide To Build A Profitable Unit Trust Portfolio

For many investors, investing in mutual funds has been a challenge. Although they hold the investment for many years, they have not been able to achieve a satisfactory return.

I would like to share some of the best practices that have been developed over the past two decades of my advisory experience to help investors build and maintain a profitable trust portfolio.

If you apply all of these best practices correctly, you should be able to reduce unnecessary risk and even improve your portfolio returns.

So, if the mission is to build a successful SICAV portfolio, where to start?

1. Define your performance goal

As with any task you embark on, the first step is to understand your goals, which in this case are your target returns. What range of ROI are you looking to build in your portfolio?

If you expect to get 8% of your annualized investment returns, you don’t want to invest all of your units in bonds and money market funds. It is very unlikely that a portfolio like this will give you an 8% return in the long term.

Instead, your portfolio should include at least 50% equity funds. This may sound like obvious advice, however, you would be surprised to find out how many investors have a portfolio of mutual funds that is not at all aligned with their target ROI.

2. Determine your asset allocation

When deciding on the asset allocation allocation for your investment portfolio, it is important to ask yourself the following questions:

  • What is the breakdown between the main asset classes such as stocks, bonds and REITS?
  • Is this ratio appropriate for your risk profile and your age?
  • What is your exposure to local, regional or global stocks?
  • Should alternative assets such as gold or commodities be included in your asset classes?

Once the ideal asset allocation has been determined, the next question to ask is: is it appropriate for the current environment?

If the ringgit weakens, it may be better to broaden your exposure to foreign investment. This diversification can increase your risk / reward ratio. By diversifying abroad, investors are also able to capitalize on stronger currencies while harnessing the growth potential of multinational companies with access to larger markets.

For example, a client has already invested 200,000 RM, mostly in Malaysian small cap funds, whose performance has fluctuated up and down. Following our advice on diversifying into more asset classes abroad, my client is now able to seize more opportunities and benefit from a better return.

3. Invest only in the best funds

This is a very important step for both amateur and novice investors to ensure that you capitalize on your potential for returns. Many are subconsciously tricked into choosing the best fund from one single mutual fund management company, instead of choosing from a larger selection among all of the different mutual fund management companies out there.

If you are investing in one category of investments, you should aim to select the best option available (with similar levels of risk) from all of the different mutual fund management companies in the market, rather than the best in a single company. mutual fund management. ..

To make sure you’re choosing the best financial products, you need to know a little about your options.

  • Know in which category the investment option belongs

Is it stocks, fixed income, commodities, real estate or alternative assets? From there, list a few investment funds available in that same category. The key word here is same category, not the same mutual fund management company.

For example, what if you want to invest in a Malaysian equity growth fund and you approach an agent of company “P” who highly recommends product “M” as the best performing fund in the company? Is this really the best fund available in the category? Malaysian Equity Growth Fund?

However, if you were to compare other funds from other companies in the same category as Fund “M”, you might find that Fund “M” is mediocre at best compared to Fund “K” in a company. different company over the same period. . Therefore, what initially seemed like the best option may turn out to be the opposite when you make the right comparisons.

performance of investment trusts

  • Know the people behind the fund

It should also be noted that the performance of the fund alone should not be the only indicator to restrict the selection of the best.

Other factors need to be taken into account, such as the people behind the fund’s management team and the robustness of the investment process.

  • Understand the options available

On the one hand are the mutual fund management companies that distribute their own financial products under a single umbrella brand and do not sell the products of other companies. It is clear that these restrictive conditions are hardly conducive to offering an investor the best investment opportunities.

At the other end of the spectrum are independent platforms carrying an “open architecture” model, where investors can access most of the funds available in the market with limited barriers. To take advantage of these platforms, investors can either go for a DIY investment (which has its own set of challenges and risks) or go the investor-assisted route, for example by going through a licensed independent financial advisor. (IF A).

By taking a little time to analyze and select your best funds across the entire mutual fund market before you make a purchase, you will get better value for the same price and level of risk. . In some cases, you can even get an additional return of 50% or more!

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What’s the best way to maintain your portfolio?

Investing in a trust fund portfolio is just the first step among many in making your hard-earned money grow.

Maintaining one is a whole different ball game. It takes a certain amount of work and due diligence. Next, I’d like to share best practices for maintaining a profitable trust portfolio.

  1. Rebalance your portfolio

First of all, good portfolio maintenance involves periodic rebalancing, i.e. the process of realigning the weightings of the asset classes in their portfolio. This is done by buying or selling funds in a portfolio to maintain the level of asset allocation originally desired.

For example, suppose the original target asset allocation is 60% stocks and 40% bonds. In a bull market, the equity portion of the portfolio could increase up to 80%. To rebalance this portfolio, an investor would sell some of their stocks to reap the profits and buy more bonds, thus moving the portfolio towards the initial target allocation of 60:40.

Why do that at all? Rebalancing is necessary to ensure that the level of risk involved is maintained at the level desired by the investor. In addition to giving investors the ability to sell high and buy low, rebalancing also allows investors to take advantage of performing investments and reinvest them in areas that have yet to experience growth. also notable.

  1. Profit from your wallet

Second, investors need to know when to sell the gains and capture the profits while leaving the capital intact. When a market experiences a correction, you can reinvest the profits to take advantage of a low buy. You may even consider selling some or all of your investments so that the money can be funneled into other more suitable investments. Ultimately, it’s important that you know your options in order to get the best possible result.

The last thing you would want is to be devoid of any options. This could happen if you do not regularly monitor the performance of the fund, making it difficult for you to know when there is a profit to be made. As a result, any profit made can erode as performance declines over time.

  1. Cut and replace underperforming funds

Third, when maintaining your portfolio, you should always replace underperforming funds with better alternatives. Investors can measure their investment performance in Malaysia by comparing it to the benchmark to check whether the fund in question is performing well in absolute terms or whether it is performing better than its benchmark.

Ask yourself how much you get in total returns, taking into account both income distributions received and price changes. Should a fund that declares regular distributions continue in your investment portfolio despite negative total returns?

In itself, the performance of a fund may appear to be good. But is it up to par with its peers, that is, other funds with similar objectives, geographic markets or sectors?

If you have identified that your investment is indeed underperforming, then what is the next step? Do you sell immediately to minimize further losses, or do you take the wait-and-see approach hoping the fund will eventually recover? If you decide to switch to a more successful fund manager, will this incur additional costs?

All in all, your investment trust portfolio is an integral part of your financial plan. But like cars, they would need regular maintenance and tune-up to keep them running at full throttle.

The uncertain future, brought on by the pandemic, and the constant changes in the investment environment continue to challenge investors. So, stay on top of your investments to make sure that the time and effort spent on acquiring your wealth is worth it.

This article is written by Yap Ming Hui, author, columnist and founder of Whitman Independent Advisors, a licensed independent financial advisory firm that has been helping Malaysians maximize their wealth and achieve financial freedom since 2000.

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