Stocks Vs Unit trust or Mutual Funds

This question about stocks vs unit trust or mutual fund is a very broad one and it very much depends on your personal goals, as to which is better for you.
The first obvious difference between stocks and unit trusts is that for stocks, you have to do your own research in order to select which stocks to buy and sell, whereas for unit trusts you delegate the management of capital to the unit trust manager.
What this obviously means is that if you intend to buy/sell stocks on your own you will need to allocate a significant portion of your time into researching stocks and keeping an eye on your investments, and if you wish to manage a large portfolio this may take up a considerable amount of time. People who have full-time jobs in non-finance related industries may have difficulty devoting the amount of time necessary to produce a reasonable return on their investments. Heck, even those in finance industries are unable to find time to manage their own money. Indeed, deciding to plunge into stocks can be a costly experience especially in the early years when one has not gained the critical amount of knowledge and experience. The learning curve is steep and the costs involved in learning lessons, also called your 'tuition fee' can involve a significant hit to your capital base.
Thus the obvious alternative is to either let the money sit in the bank account or in fixed return securities (an option which I think is far underrated) or to delegate your capital into the hands of a investment manager. This presents another set of problems because now you have to evaluate the competence of the unit trust managers, and you also have to beware that you do not pay excessive charges. Furthermore, it is a well known fact that most money managers underperform the stock market indices despite the fact that investing in index funds involves much lower charges, since they are passively managed.
My answer to the question is that both stocks and unit trusts are good, depending on whether the investor is able to develop the competence and devote the time into learning about them and to evaluating their chosen vehicle of investment. Learning how to analyse individual stocks will involve learning how to analyse financial statements, competitive strategy, valuation and a whole host of other investment analysis tools. Learning how to evaluate unit trusts will require an understanding of macroeconomics and the various unit trust strategies (global macro/sector rotation/country analysis etc.)
In otherwords, it doesn't matter which approach you choose, if you want satisfactory results, you have to do your homework.
So, where does that leave the investor who does not have much experience or knowledge of investing and does not have the time to devote into acquiring it?
My answer is index funds. Yes. These are lovely since they outperform 2/3s of all actively managed funds over the long run. They involve low management fees and can give you peace of mind, as long as you are dedicated to investing for the long run (5+ years or more) and have the discipline to follow a simple saving/investment plan.
But of course, most people like to get their hands dirty and like the feeling of being in charge of their destiny - few want to be simply 'above average', they want to make lots of money.
Well, that is possible. If you have the brains, balls, and hardwork, you might be successful as an investor. But many have tried and have just ended up as mediocre underperforming investors who would have been better off just sticking their money in the index funds.
Which kind of investor are you? What risks are you willing to take?
That's a question only you can answer. 

http://www.sap-basis-abap.com/shares/stocks-vs-unit-trust-or-mutual-funds.htm

What to expect from a unit trust fund's annual report

Annual reports: Read before you weep
Published: 2009/06/10

There is no short cut when you're dealing with investments, even if it is one of the less complicated and taxing reports, says Securities Industry Development Corp

AFTER last week's article, some of you may have already started going through unit trust fund's annual reports for your future funds.

If you somehow stopped at the pages filled with a plethora of numbers, waiting for this installment to be released, so as to get a rough idea about what those numbers represent, do not fret! Read on and we will tell you what the following pages of your annual reports are all about.

Financial Statements

Never ignore the financial statements part! For those of you who are interested in drilling down further into the financial details, what you need to scrutinise are the financial statements that have been elaborately presented before you.

Your financial statements comprise:

* Income Statement

* Balance Sheet

* Statement of Changes in Net Asset Value (NAV)

* Cash Flow Statement

What do all these mean?

* Income Statement

The income statement will provide details on the investment activities, relative to the previous financial year's activities.

This statement will provide you with a way to differentiate the net income/loss contributed by realised gain/loss versus unrealised gain/loss, which is the result of portfolio revaluation.

For example, a fund's net income is reported as RM1 million, but the realised investment loss is RM2 million, offset by an unrealised gain of RM3 million. Here, you can tell that the RM1 million net income reported does not truly reflect the actual performance of the company. It's simply a matter of accounting practice that the amount is recorded as such.

As an investor, you need to be mindful of the unrealised items, such as unrealised gain or loss on foreign exchange, which may appear in the Income Statement.

* Balance Sheet

There are a few critical pieces of financial information that you can learn from this statement:

(i) whether the fund's total asset is appreciating or depreciating as compared to the previous period.

(ii) whether the units in circulation are increasing or decreasing - a significant decrease in units in circulation shows that the cancellation of units is much greater than creation of units for sale, which also implies that the fund is losing popularity among its existing customers.

* Statement of Changes in NAV

This statement will provide the details on the changes in the NAV during the period and differentiate between the changes contributed by investment activities and transactions with unit holders.

You should be able to see the net impact of undistributed income due to investment activities versus movement due to unit creation or redemption.

From here, it will tell whether the increase or decrease in the fund's value is due to investment effort or expansion/shrinkage in the funds.

For example, if a net decrease of RM5 million in NAV is attributed to RM1 million net increase in undistributed income and RM6 million in amount paid on cancellation of units under the movement due to unit redemption, you may want to be more cautious and investigate further on the reasons behind the redemption from the unit holders.

* Cash Flow Statement

This statement tells you where cash flow for the year is being generated and spent, whether the sources of cash flows are from operating or investment activities and financing activities.

Notes to Financial Statements

Notes can be rather mind-boggling but they function as a supplement to the financial statements and help make sense of the numbers presented.


* Management Expense Ratio

As managing a fund requires a whole team of professionals, the cost incurred to run a fund is part of the cost of investing in unit trust for an investor.

The cost inherent in operating a fund includes management fees, trustee fee, audit fee, administrative expenses (printing of annual reports, distribution warrants, and postage) and other service charges incurred in the management of the fund.

Management Expense ratio is the ratio of the total of all the fees incurred for the period deducted from the fund and all the expenses recovered from and/or charged to the fund, expressed as a percentage of the average value of the fund. It can be summarised as follows:

The MER ratio should be fairly consistent over the years. If you see a significant difference from the previous year, you will need to find out the reason for the change. This is a useful ratio to compare the fund you have invested in or intend to invest with other similar funds in your fund selection process.

The higher the MER ratio, the more expenses are required to manage the fund. Therefore, when you draw up comparisons between funds within a similar range, the ones having similar performance but with lower MER will be more beneficial to you as an investor, because less money is being spent by the managers and more is available for distribution.


* Portfolio Turnover Ratio

Portfolio Turnover ratio measures the average acquisitions and disposals of securities of a fund. The calculation is as follows:

The PTR usually comes after the section on MER in an annual report's notes to financial statement. PTR indicates the rate of trading activity in a fund's portfolio of investments. If the PTR is high, it means that the fund manager is constantly changing the companies or financial instruments in the portfolio. As each and every transaction involves cost, high turnover indicates that the transaction cost incurred is high and it will in turn eat into the profit earned, which will eventually not work out to the benefit of the investors.

You should also look for any other extraordinary items stated in the notes to financial statements, especially events that can materially affect the portfolio's performance or investors' interests, such as change of fund managers and investment committee members, compliance issues, change of investment objectives or policies and major change of shareholders.

Now that you know what to expect from a unit trust fund's annual report, it is high time you get started with the actual reading! There is no short cut when you're dealing with investments, even if it is one of the less complicated and taxing reports. You need to know what you are parting your money for and to whom you will be giving it in order to manage it, so "Read Before You Weep!"

Securities Industry Development Corp (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.


http://www.btimes.com.my/Current_News/BTIMES/articles/sidc17/Article/