Sunday, April 12, 2009

Facts and myth about mutual fund

What is mutual fund?

A mutual fund is a pool of money that is professionally managed for the benefit for all shareholders.

 

Mutual fund and stock market

What is the different on investing in mutual fund with stock investments? Well, what actually differ it- is none. Both are about putting your money in the stock market. However, investing in mutual fund will help you on diversifying your investment portfolio as the unit trust company will sum up the amount of all the investors they have and diversify it. There is no need for daily observation of stock price or analysis on stock price because your advisors in the unit trust company will do it all for you.

 

It is all about putting your eggs in different baskets. If you drop one of it, the others are still safe. And it is not you the one who holding those baskets. You hired experienced and professional individuals on holding eggs in baskets to hold your eggs.  These are the two strong points why we should choose mutual fund investment as one of our investment portfolios. 

 

Investment fact: why mutual fund is a long term investment?

There will always be charges. The time you bought a fund, you are actually losing. For an example, if a fund is 1 dollar per unit, and the minimum investment required by the unit trust company is 1k, you are not having a thousand units. It will be only 900++ units.


I am not going to explain more on charges. To make it simple, the minute you bought a fund, you are losing because you need to pay the mutual fund company service charge. That is why you are not having a capital appreciation on early year of your investment period. The second factor is the diversification. It’s a financial principle. The less risk you are having, the less return you will get. A unit trust company is issuing you funds, not stocks. A fund consists of variety of stocks. That is how diversification happened.

 

If you bought stock directly from the investment banker, there is a probability the stock price going up and you can sell it immediately. However, you bought a fund from the mutual fund company. If Mr. A bought stock A from the investment banker, he invest 100% of his capital in it while you might be investing in stock A for 20% from your total capital while other 80% is on other stocks. It takes time to have capital appreciation by doing diversification. Now you should be aware of the nature of mutual fund. You should not argue “why must I wait up until 3years to gain profit?”

 

I know waiting is torturing but it worth it. You didn’t do anything. You don’t even observe the market price and you don’t even have to do fundamental analysis nor technical analysis. All of these already been settled by your advisors in the mutual fund company. Most important thing is, the risk you are having is lesser than Mr. A. 

 

Why choose mutual fund instead of leaving our money in the bank?

 

Why? Instead of having 2-3 percent interest from the bank, you can earn 10-20 percent of interest from your mutual fund investment. The banks also need money. Why should they give you more and help you keeping your money safe in their safe vault for free? They need to cover all the costs keeping your money safe, which is why you earn less from the bank.

 

Why there is interest? While only dividend and capital appreciation are the ways to gain profit in the stock market.

 

To ease the explanation the mutual fund companies and agents to the customers. The trick is the same -Dividends and capital appreciation.