Posted by - October 9, 2024

Unit Trust as an Investment Tool to Overcome Inflation

 

Inflation is an economic challenge that erodes the value of money over time. As inflation rises, the cost of goods and services increases, reducing the purchasing power of your money. To combat the effects of inflation, it’s essential to invest in instruments that can provide returns higher than the inflation rate. Unit trusts are one such investment option that can help protect the value of your money against inflation in the long term.

What is a Unit Trust?

A unit trust is a collective investment where funds from many investors are pooled together to invest in various assets such as stocks, bonds, and money market instruments. These funds are managed by professional fund managers who determine the investment strategy based on the fund’s objectives. By investing in unit trusts, you benefit from professional expertise and gain access to a wide range of assets that might be difficult to access individually.

Why is Inflation Concerning?

Inflation directly impacts your savings. For example, if inflation is at 3% per year, this means the cost of living increases by 3% annually. If your money is not growing at the same or a higher rate, the real value of your savings will diminish.

For instance, if you save RM10,000 in a regular savings account that only offers 1% interest per year, but inflation is at 3%, you’re effectively losing 2% of your purchasing power every year. Over time, the real value of your savings will significantly decrease.

How Unit Trusts Help Fight Inflation

1. Higher Return Potential

Unit trusts generally offer the potential for higher returns compared to savings accounts or fixed deposits. This is because the funds are invested in various assets that can provide higher returns, particularly in equities (stocks) and real estate, which tend to outperform inflation over the long term.

For example, shares of large companies or fast-growing companies often offer better returns than the inflation rate, especially when the economy is expanding. Investing in equity-based unit trusts gives you exposure to these companies without needing to buy individual stocks.

2. Diversification

One way unit trusts protect investors from inflation is through diversification. Fund managers invest money in various sectors and asset classes, such as stocks, bonds, and money markets. With diversification, losses in one sector can be balanced by potential gains in another, making the investment more stable even in uncertain economic conditions caused by inflation.

For instance, if one sector is affected by inflation or an economic slowdown, another sector might still generate positive returns, helping to maintain the growth of your investment.

3. Professional Management

Unit trust fund managers are trained to monitor the market and make decisions based on deep economic analysis. They continuously look for opportunities to maximize returns, including adjusting their investment strategies based on inflation forecasts and market conditions. Their expertise gives investors an advantage in managing risk and increasing the chances of beating the inflation rate.

4. Adaptability to Economic Changes

Compared to fixed-term investments like fixed deposits, unit trusts are more flexible because fund managers can change their investment strategy based on economic shifts. For example, during periods of high inflation, fund managers might shift a larger portion of investments into more resilient assets such as gold or real estate, which typically retain their value over the long term.

5. Investment in Real Assets

Real assets such as property and commodities are often seen as a hedge against inflation. Some unit trust funds have exposure to these assets, either directly through real estate investments or indirectly through companies involved in these sectors. These assets tend to appreciate in value during periods of inflation, making them a good investment tool for protecting the value of your wealth.

Unit Trusts Based on Bonds and Interest Rates

In addition to equities, bond-based unit trusts can also help maintain stability during inflation, especially in a low-interest-rate environment. Bonds issued by governments or strong companies tend to offer more stable returns compared to stocks. Although bond returns may be lower than stocks, they can be an important component of an overall investment strategy designed to combat inflation.

Risks of Unit Trusts

While unit trusts offer the potential to combat inflation, they still carry risks. Returns are not guaranteed and depend on market performance. Additionally, there are management fees charged by fund managers, which can affect your net returns. Therefore, it’s important to understand your risk profile and choose funds that align with your investment objectives and risk tolerance.

Conclusion

Inflation is an unavoidable challenge in a modern economy, and saving money without effective investments can cause the value of your money to erode. Unit trusts provide a potential solution to inflation by offering growth opportunities and value protection through diversification and professional management.

However, every investment carries risks, and it’s crucial to plan carefully and choose unit trust funds that match your financial goals. With the right approach, unit trusts can be an effective tool for protecting and growing your wealth against the effects of inflation, ensuring you’re better prepared for a more stable financial future.

© DKF