Unit Trust Of India: A Guide To Investing

Unit Trust of India (UTI) is a statutory private sector investment body established on February 1, 1964, with the primary objective of channelling corporate investments by encouraging productive community savings. It allows small-time savers to invest in risk-diverse fields and targets middle and low-income groups to encourage them to invest productively. UTI offers a safe return on investment whenever there is a requirement for funds. It provides a daily price record, advertising the purchase and sale price of the units in newspapers. The price usually varies between July and June, with July being the best time to invest as the purchase price is the lowest. UTI also has a range of schemes, such as the Unit Linked Insurance Plan introduced in 1917 and the Senior Citizens Unit Plan introduced in 1993. There are three main ways to invest in UTI: cash or lump-sum investments, regular savings, and investment through EPF savings.

Lump sum investments

For example, someone who has recently inherited a sum of money may wish to invest it in a unit trust and hold it for an extended period to save for a specific purpose, such as their children's education. At the end of the holding period, the proceeds of the sale of the units will be the initial investment plus the returns on that amount, accumulated over time.

Unit trust funds are also an ideal way to accumulate capital for future needs in a disciplined manner. By making regular contributions over a period of time, the sum accumulated at the end will increase. This is commonly known as dollar-cost averaging. The effect is more noticeable the longer the holding and contribution period. This form of savings is the basis of most pension fund accumulations, such as the Employees Provident Fund.

Unit trusts are a form of collective investment that allows investors with similar investment objectives to pool their funds to be invested in a portfolio of securities or other assets. Unit trust investors are typically those with savings to invest, who neither have the time nor the inclination to hold portfolios of direct investments or shares. Instead, they prefer to invest in a secure, reputable investment vehicle that suits their purposes. Unit trusts allow investors to have easy access to a wide range of investments not normally available to them.

Unit trusts are particularly attractive to investors seeking to maximise returns on their financial resources. In the medium to long term (3-20 years), unit trust investments generally provide better returns at acceptable levels of risk. The cost of these potentially higher returns is, of course, the risk that accompanies the investment.

Unit trusts are also very affordable. Investors can start with an investment amount as low as RM100. Unit trusts provide investors with liquidity, allowing them to easily buy and sell without difficulties.

The people entrusted to manage unit trusts are approved professionals. Their training and background ensure that decision-making is structured and follows sound investment principles. In the long term, it is this expertise that should generate above-average investment returns for unit trust investors.

Regular savings plans

To set up an RSP, you can use an Online Unit Trust Platform, which offers flexibility in investment and transaction accounts. The minimum investment amount varies depending on the fund, with most unit trusts requiring an initial investment of around S$1,000, and subsequent investments ranging from S$100 to S$500. It is important to note that you can adjust your investment amount and cancel your RSP investments at any time.

To get started, you will need to open a Current/Savings Account and have access to Online Banking. From there, you can follow the steps provided by your financial institution to set up your RSP. This usually involves logging into your online banking, navigating to the relevant investment section, completing the necessary forms, and making your initial investment.

By utilising an RSP, you can take advantage of the benefits of Unit Trusts, including diversification, professional management, and easy access to the markets, all while maintaining discipline in your investment journey.

Tax benefits

Unit Trust of India (UTI) offers a rebate on income tax for investors. This rebate is applicable to the investment in UTI and the income generated from it. However, the exemption on the income from UTI is subject to certain conditions.

UTI is a statutory private sector investment body established on February 1, 1964, to encourage small and middle-income groups to invest their savings productively. UTI pools funds from multiple investors and channels them into diverse investment avenues to minimise risk. The body is governed by a board of trustees, including nominees from the Reserve Bank of India, State Bank of India, and Life Insurance Corporation of India.

UTI offers several tax benefits to investors:

• Income Tax Rebate: UTI provides a rebate on income tax for investments made in the trust. This rebate effectively lowers the tax liability for investors, resulting in more after-tax returns.
• Tax Exemption on Income: Under certain conditions, the income generated from UTI investments is exempt from income tax. This means that investors can receive their returns without having to pay additional taxes on the profits.
• Tax Efficiency: UTI investments are generally structured as passive investments, resulting in lower turnover and reduced capital gains taxes for investors. The trust itself is also tax-exempt, passing all income and gains to the investors.
• Long-Term Holding Benefits: UTI investments are designed for long-term holding periods. While this may reduce liquidity, it can offer tax advantages over short-term investments, as many tax codes offer preferential rates for long-term capital gains.
• Diversification and Risk Mitigation: By pooling funds from multiple investors, UTI can diversify its investments across various securities and industries. This diversification helps to minimise risk and provide a more stable investment platform for investors.

Liquidity

The Unit Trust of India (UTI) offers a high degree of liquidity to its investors. UTI units can be sold back to the trust at any time for a specific price, providing investors with the flexibility to access their money when needed. This feature is particularly attractive to investors who require liquidity and the ability to quickly convert their investments into cash.

UTI also provides daily price records, quoting both the purchase and sale prices of the units on a daily basis. While the prices may fluctuate daily, these changes are typically nominal on a monthly basis. The purchase price of the units is usually the lowest in the month of July, making it an ideal time for investors to purchase units at a favourable price.

In addition to the liquidity provided by UTI, there are different types of unit trust funds that offer varying levels of liquidity. Open-ended funds, for example, offer continuous subscription and repurchase options, allowing investors to buy and sell units at Net Asset Value (NAV)-related prices that are declared daily. This flexibility is a key advantage of open-ended funds.

On the other hand, close-ended funds have a stipulated maturity period, typically ranging from 5 to 7 years. Investors can purchase units during the initial public issue or buy and sell units through stock exchanges where the units are listed. Some close-ended funds provide an exit route by offering the option to sell back units to the mutual fund at NAV-related prices.

Overall, unit trusts, including UTI, are designed to provide liquidity to investors. The ability to easily buy and sell units, along with daily price records and favourable purchase timings, enhances the liquidity offered by these investment vehicles. Different types of unit trust funds also provide varying levels of liquidity, with open-ended funds offering the most flexibility in terms of subscription and repurchase options.

Diversification

Unit trusts offer investors access to a diverse portfolio of securities, including stocks, bonds, and other assets. This diversification reduces the risk of losses due to the underperformance of any single security. It is important to note, however, that some unit trusts are industry-specific, and these trusts may carry higher risk.

Unit trusts also provide investors with the opportunity to invest in a range of asset classes, including equities, fixed-income securities, and cash. This allows investors to reduce their exposure to risk by not putting all their eggs in one basket. For example, an investor can gain exposure to the Malaysian property market, global equity markets, and the Malaysian bond market simultaneously through unit trust investments.

In addition to diversifying across asset classes, unit trusts also enable investors to access worldwide markets. This global reach further enhances the diversification benefits of unit trusts, providing investors with greater opportunities for returns and protecting them from adverse market cycles, such as the COVID-19 pandemic.

The diversification benefits of unit trusts are particularly attractive to investors who may not have the time or inclination to manage a portfolio of direct investments or shares. Unit trusts offer an easy and convenient way to access a wide range of investments that may not be available to individual investors.

Frequently asked questions