Unit trust fund prospectus: What you need to know

Almost everyone everywhere may have heard this message "Please read the prospectus before investing". Be it from the radio or by any pamphlets/leaflets in relation to unit trust investing.

The question is - do you know how to read one?

What is a prospectus?

A prospectus is the most important document that you need to get hold of before committing yourself to a fund. It serves as a roadmap for you to know what you can expect to get from the fund.

Since there is a wide range of unit trust funds being offered in the market with various investment objectives and risks involved, investors need to make wise decisions in choosing suitable funds for themselves. As with any other form of investment, investors need to do their homework first before jumping on the bandwagon. This among others, entails reading unit trust funds' prospectuses.

Guide to reading a prospectus

Before you make that final call to part with your money, get yourself a copy of prospectuses from different funds and read through them to get a better understanding of the different funds available.

Here are some of the key elements that you need to remember when reading a prospectus:

* Investment objective

* Investment objectiveWhile some funds are aimed at providing a steady stream of income, others are mainly focused on gaining long-term capital growth, or a mix between the two. Depending on your own investment objective, when you choose a unit trust fund, make sure that the investment objective of the fund is consistent with what you intend to achieve with your money.

* Investment strategy

* Investment strategyThis tells you how the fund managers are going to achieve the stated objective; the approach that they are going to take and how the asset allocation is going to be in terms of exposure to various investment vehicles and sector selections. It also highlights the relevant domestic or foreign exposures of the fund. You may want to check on the fund's turnover rate, as to how frequent the managers re-balance the portfolio through buying and selling. High frequency of trading may indicate high transaction cost, which will eventually eat into the profit of the fund.

* Risk factors

* Risk factorsPay attention to the risk factors stated and compare them to your own risk profile and risk tolerance level. The risk factors faced are typically market risk, interest risk, liquidity risk and credit risk. A fund holding investments in emerging markets will be subjected to the economic and political conditions there. Any changes in the foreign currency exchange rate will affect the return of the respective funds.

* Investors' profile

* Investors' profileMost prospectuses include an investor profile as guidance for potential investors. It tells you the characteristics of investors who will potentially invest in the fund. However, this is subject to your own unique circumstances that you will need to observe.

* Financial performance

* Financial performanceThis serves as a good indicator of how the fund is managed, especially if the fund has been in existence for a long period. If the fund has managed to survive through adverse conditions, you will naturally have more confidence in its future performance. You can also use this to compare a particular fund's performance with that of other similar funds and its performance benchmark.

Remember! Past performance does not guarantee future success of the fund!

* Fees and charges

* Fees and charges As all unit trust funds are professionally managed, various expenses and charges will be incurred, compared to an outright purchase of a security. Some of the relevant fees and charges are:

1) Load (sales commission)

Load funds can charge a front-end load (when you purchase fund shares) or a back-end load (when you sell your shares).

2) Redemption fee

While loads are calculated on the amount you invest, redemption fees are calculated as a percentage of the value of your account when you get out.

3) Purchase fee

You may be charged for share purchases. While a front-end load is paid to a broker, purchase fees are paid to the fund for some of the fund's costs associated with the purchase.

4) Exchange fee

This is incurred for exchange (transfer) to another fund within the same fund family.

5) Management fees

This is paid out of the fund's assets and covers operating expenses of the fund's managers and advisors.

6) Distribution fees

This covers fees paid for distribution of fund literature, marketing costs, and sales commissions paid to brokers.

7) Administrative fees

Included here are expenses such as custodial expenses, legal expenses, accounting expenses, and transfer agent expenses.

All the above charges will be added up when calculating a fund's expense ratio, which is expressed as a percentage of the fund's assets. It will enable you to make a meaningful comparison among the cost structure of different funds.

Last words

Prospectuses may not be as attention grabbing or engaging as your hot selling novels, but reading them is a must! Spending some of your precious time going through them is definitely worthwhile! It helps to prevent you from making investment decisions that you will end up regretting later. Confucius once said, "Good people strengthen themselves ceaselessly" and we believe that good investors strengthen themselves with constant pursuit of knowledge endlessly.

Securities Industry Development Corporation (SIDC), the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission, Malaysia. It was established in 1994 and incorporated in 2007.