Unit Trust Investment - Re-look!

Ever wonder why your unit trust consultant constantly advice you about the importance of Dollar-Cost-Average (DCA) strategy as a part of holistic approach with regards to optimising your return on investment (ROI)?

No...no...! It is not that they are positioning themselves to make a quick buck out of the sales through the commission payout. Honestly, they are here to assist people like you and me to make sound investment with hope to be financially liberated at every facet of our precious life. Like any other professionals dealing with financial products, unit trust consultants work and abide along the sacred Rules and Principles outlined by the Federation of Investment Managers of Malaysia (FIMM). Violating any of these rules will just invite serious repercussion that could see the end of the consultant's career in this industry.

Trust the consultants as you would expect the consultants to do the same to you!

Okay, having said that, the next few minutes i will try to tell you how important is the DCA.


It is one among other strategies that your consultant would implement.
The definition of this DCA can possibly be best described as, "A strategy to reduce the holding cost per unit of your unit trust fund to a price lower than the prevailing current market price with hope to maximize return upon exit."


Let us look at the diagram 1.1 below.

Assume that you bought one Unit trust fund called Fund Super Bull at RM 0.2500 a unit. For the purpose of clarity, i would like to emphasize that in this example, you bought only 1(one) unit, although in reality this cannot be true. (Most Unit Trust company limit their minimum purchases to RM1000 for initial investment)


The Green Bar in the chart represents the cost of purchase@ RM 0.2500 for buying a unit (ignoring any entry fees). The blue bar represents the new price hike after purchase and the maroon colour represent the future price of the same unit at market downfall. The cost per unit remains the same at Point A, B and C because there is no additional new investment. This means the cost remains stagnant irrespective of duration of holding it. If you decide to relinquish the whole units a t Point B, your return would be RM0.0040 a unit (see diagram). At Point C, you will get a loss of RM0.0025 a unit.


When you make a new investment into this very same fund, at the back of descending market condition, the cost per unit then gets lowered. Diagram1.2 referred.

Assume the cost now is RM 0.2480, as labelled A on the diagram 1.2. Should you decide to redeem at Point B at RM 0.2540, your return now grows bigger to RM 0.0060 a unit in comparative to example 1.1 above. Even if you decide to relinquish at Point C, your return still is higher than if you did not do DCA as shown in diagram 1.1.


If you continue make new investment into this fund (at descending market), the cost per unit further falls down. Example in diagram 1.3 illustrates.

One thing you learned here is that, every time you make a new investment in the same fund in my example above, the holding cost will go down and subsequently widens the profit margin. Another thing you learned is, always keep your holding cost below the prevailing market price by means of DCA. You don't get anything if current prevailing market unit price is higher than your holding cost per unit.


Your Unit Trust Consultant was right about asking you to do regular new investment. No..not because of the sales commission but he had your interest in his mind!