7A.8 Borrowing to Invest in UTS and the Risks of Loan Financing

FIMM Combined Examination FCE

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1 Introduction: The FIMM Combined Examination (FCE)

0.1 FCE Exam Facts, Registration Rules and How to Use This Guide

2 Chapter 1: Understanding Collective Investment Schemes in Malaysia

1.1 What a Collective Investment Scheme Is and How Malaysian CIS Are Classified 1.2 Investment-Linked Funds Are Not UTS; Industry Growth and History 1.3 Participants in the CIS Ecosystem: Unit Holders, Managers, Trustees, Distributors and Regulators

3 Chapter 2: Introduction to UTS and PRS

2.1 UTS and PRS as Investments: Mechanics, Unit Calculations and How They Compare 2.2 Types of Funds: By Asset Class, Fund Structure and Investment Objective 2.3 Methods of Investing and Dollar Cost Averaging 2.4 Benefits and Disadvantages of Investing in UTS and PRS 2.5 Understanding Risk and the Risks of Investing in Schemes 2.6 Shariah-Compliant Schemes, Their Risks and the Role of the Shariah Advisory Council

4 Chapter 3: Regulatory Framework

3.1 The Regulatory Framework: The SC, Other Regulators and FIMM's Dual Role 3.2 Legislation, SC Guidelines and FIMM Rules Governing UTS and PRS 3.3 Regulation of Scheme Providers and Oversight Functions 3.4 The Deed, the Prospectus or Disclosure Document, and the Product Highlights Sheet 3.5 Portfolio Constraints: Permitted Investments, Liquidity, Borrowing and Exposure Limits 3.6 Regulations for Other CIS: Real Estate Investment Trusts and Exchange-Traded Funds 3.7 Regulation and Duties of the Scheme Trustee 3.8 Regulation of Marketing and Distribution: Distributor Categories, Collection Points and Agency Structure 3.9 Registration of Consultants: Eligibility, Fit and Proper, Duration, Variation and Revocation

5 Chapter 4 (Part 1): Marketing and Distribution — Disclosure and Transactions

4.1 Servicing Investors and the Contents of the Prospectus and Disclosure Document 4.2 The Product Highlights Sheet, Advertising Standards and Account Maintenance 4.3 The Purchase Process and Suitability Assessment Before Personal Advice 4.4 Cooling-Off Rights, Repurchase of Units, Suspension and Switching 4.5 Financing the Purchase of UTS: Process, Safeguards and the Risk Disclosure Statement 4.6 EPF Transfers and Withdrawals for Investment in Approved Unit Trust Funds

6 Chapter 4 (Part 2): Marketing and Distribution — Distributions, Reporting and Service

4.7 Distributable Income, Distributions and NAV, "Buying" a Distribution and Taxation 4.8 Reporting to Investors: Confirmations, Statements, and Semi-Annual and Annual Reports 4.9 Marketing Principles, Delivering Quality Service and Handling Complaints 4.10 The Effect of Inflation, Taxation and Investment Costs on Returns 4.11 Investment Alternatives to UTS and PRS

7 Chapter 5: Code of Ethics

5.1 Compliance, Ethics and the Structure of the FIMM Code of Ethics 5.2 Core Principle 1: Honesty and Integrity 5.3 Core Principle 2: Professionalism 5.4 Core Principles 3 to 5 and Non-Compliance: Conflicts, Disclosure, Confidentiality and Misconduct

8 Chapter 6: Personal Financial Planning

6.1 Personal Financial Planning: Definition, Features, Five Areas and the Six Steps 6.2 Financial Planner Credentials, Skills, Remuneration, and How a Planner Differs from a Consultant 6.3 The Consultant's Role in Investment Planning and Advising Clients Through the Life Cycle

9 Chapter 7A: Features and Operations of UTS

7A.1 Structure of a UTS, the Trust Deed, the Parties and Modifying the Deed 7A.2 UTS Fees, Charges and Expenses, and the Management Expense Ratio 7A.3 Dealing in Units, Valuation, NAV Calculation and Unit Prices 7A.4 Forward and Historical Pricing, and the UTMC's Holding of Units 7A.5 Unit Splits, Distributions and Their Effect on NAV 7A.6 Measuring UTS Performance: Returns, Performance Tables, Risk Measures and Qualitative Factors 7A.7 Operational Aspects of Shariah-Compliant UTS and PRS and the Shariah Contracts Between the Parties 7A.8 Borrowing to Invest in UTS and the Risks of Loan Financing

10 Chapter 7B (Part 1): The Pension Landscape and the PRS Framework

7B.1 The Malaysian Pension Landscape and the Adequacy of Retirement Savings 7B.2 The World Bank's Five-Pillar Pension Framework in the Malaysian Context 7B.3 Key Players: EPF, KWAP, LTAT, Employer-Sponsored Schemes and Annuities 7B.4 Why Malaysia Needs PRS: Ageing, Longevity Risk and the Benefits of PRS 7B.5 The PRS Framework and the Private Pension Administrator (PPA) 7B.6 PRS Structure, the Trust and Deed, Advantages over Other Products, Eligibility and Contributions

11 Chapter 7B (Part 2): PRS Operations

7B.7 The PRS Default Option and Tax Incentives for Members and Employers 7B.8 The PRS Account Structure (Sub-Accounts A and B) and Vesting 7B.9 PRS Withdrawals: Pre-Retirement, Retirement, Permanent Departure, Incapacity and Death 7B.10 Switching Between Funds and Transferring Between PRS Providers (Portability) 7B.11 Unclaimed Monies, Death of a Member and PRS Nomination 7B.12 PRS Funds: Number, Core and Non-Core Funds, Objectives, Risk Profiles, Asset Classes, Authorisation and Naming 7B.13 PRS Fees, Charges and Expenses 7B.14 PRS Unit Creation, Forward Pricing, Valuation, Distributions, Performance Measurement and Electronic Communication

7A.8 Borrowing to Invest in UTS and the Risks of Loan Financing

Key Takeaways Explain This Topic AI

Loan financing is allowed for UTS investment but not for PRS, and because of its risks the study guide says it is not encouraged.

The maximum loan-to-valuation ratio, or margin of finance, for a UTS loan is 67%, so an investor buying RM100,000 of units could borrow up to RM67,000.

Borrowers must be over 18 and should be under 55 at the end of the loan term, and monthly repayments do not normally exceed one-third of gross monthly income.

If a borrower defaults, the lender may sell the units at a time it chooses, and the borrower must pay any shortfall between the sale proceeds and the loan.

The study guide cites studies showing the chance of losing money on Bursa Malaysia can be up to 35% in any one year, 28% over two years and 21% over five years.

Last updated: October 2026

Why Investors Borrow

Chapter 2 covered lump sums, reinvestment and regular savings. Another method is borrowing (loan financing) , allowed for UTS but not PRS , and not encouraged because of its risks.

Investors borrow to leverage (gear) their investment, hoping the fund's return will exceed the cost of borrowing. Lenders usually require some of the investor's own money alongside the loan.

Leverage in numbers (illustration)

An investor puts in RM30,000 of her own money and borrows RM60,000 at 5% a year, investing RM90,000 (loan share 66.7%).

Fund return over one year Value of units Loan interest Gain or loss on her RM30,000
+10% RM99,000 RM3,000 +RM6,000 ( +20% )
0% RM90,000 RM3,000 −RM3,000 ( −10% )
−10% RM81,000 RM3,000 −RM12,000 ( −40% )

Charges and taxes are ignored. Without borrowing, the same fund would have given her +10%, 0% or −10%. The loan stays the same while the units fall , so losses on her own capital are magnified, and if she must sell she has to repay the shortfall from other savings.

Typical Loan Features in Malaysia

Feature Study guide description
Lenders Most banks and finance companies; often a panel of lenders approved for UTS financing
Term Up to 10 years
Amount Usually between RM10,000 and RM250,000

Rate Usually variable : the lender's Base Rate, Base Lending Rate (conventional) or Base Financing Rate (Islamic), plus a margin; generally higher than housing or personal loan rates

Maximum margin 67% loan-to-valuation; RM100,000 of units allows a loan of up to RM67,000
Age Borrower over 18 and under 55 at the end of the loan term (income-earning years)
Affordability Monthly repayments normally no more than one-third of gross monthly income

The SC requires the UTMC to ensure Consultants do not encourage loan-financed sales, and the investor must sign the Unit Trust Loan Financing Risk Disclosure Statement (section 4.5).

The Four Risks of Borrowing to Invest
1. Interest rate fluctuations

Loans are usually at variable rates , so the total cost cannot be predicted and the expected profit after interest is uncertain.

2. Default in repayment

If the borrower misses repayments, the lender may liquidate the units , with or without consent, at a time the lender chooses , possibly at a market low. The borrower loses control of the sale and must pay any shortfall between the sale proceeds and the loan.

3. Premature repayment

The loan may run up to 10 years, but events such as job loss may force early repayment. The study guide notes that most loans repaid in the first five years suffer more losses than gains, citing studies that the chance of losing money on the stock market (Bursa Malaysia) can be up to 35% in any one year, 28% over two years and 21% over five years .

4. Margin call

If unit prices fall, the units held as collateral may no longer give the lender enough security, so it makes a margin call to top up the security. If the borrower cannot pay on top of normal instalments, the lender can force-sell units, possibly at the worst time.

How a margin call arises (illustration)

Suppose the loan agreement requires the units held as security to be worth at least RM1.30 for every RM1.00 of loan outstanding (lenders set their own levels; this figure is only for illustration). The investor borrowed RM60,000 and holds units worth RM90,000, so cover is 1.5 times.

Market move Value of units Cover (units ÷ loan) Result
None RM90,000 1.50 Within limit
Units fall 10% RM81,000 1.35 Within limit
Units fall 15% RM76,500 1.275 Margin call : top up about RM1,500 in collateral or cash to restore 1.30 cover

If she cannot meet the call on top of her monthly instalments, the lender may force-sell units, locking in the loss at a market low.

Should an Investor Borrow?

Each case is different, but investors must consider the implications carefully. If an investor does not understand both the UTS investment and the loan, they should not borrow. The study guide suggests that Consultants may do better to recommend the regular savings method.

Question to ask the client Why
Could you keep up repayments if your income fell? Default leads to forced sale
Could you meet a margin call from other savings? Falling prices can trigger calls
Could you hold for the full term? Early repayment raises the chance of a loss
How would a rate rise affect you? Variable rates change the total cost