Saturday, September 09, 2006

Mutual Fund/ Unit Trusts

Lesson 8: Mutual Fund/ Unit Trusts

Ok......., today we are going to talk about something most readers are concerned about. If I have extra money, where should I put my money? Mutual fund or unit trusts is always a popular option among beginners.

" Where to put your money?"

What is actually mutual fund? Americans use mutual fund but a lot of Asian countries such as Malaysia and Singapore, our people here call it unit trusts.

Actually the concept is simple, a co-operation or company with a few what they claim themselves as " expert investors" set up a fund where you put your hard earned money, they promise they would invest these monies for you in stock market, bond , property or even money market. They are supposed to help you to earn extra money and the returns they get are management fees and transaction fees. A lot of laymen like you and me are very interested to invest but we just do not have the time to follow the stock market and we hardly have any idea which stock to buy since that your country may have one thousand and one hundred stocks available. So these people provide you a better choice, they would help you to monitor the market and they claim that they can do better than the average stocks returns.

These people whom they call themselves as fund managers are usually equipped with a degree in business or commerce. They have vast experience in investment. You may wandering, since that they know how to invest, why they are willing to share this trick with other layman investors like you and me? The answer is simple, by 'helping' you to invest, their income in guaranteed regardless of the market performance.
Why this thing is happening? Because we are paying them for the services. If you read through the prospectus carefully, they would state that no matter they are making money for you or not, every time you are buying the units, you have to pay up to 5-6.5% more the unit actual net asset value ( NAV). ( Malaysian Unit trusts figures). For an example, if there are 1000 units in a fund and these units worth RM1000, NAV of one unit is RM1, but they are selling to you at RM1.05 ( 5% higher). Besides making money like this,
at the end of every financial year, they charge you managers' fees which can be up to 3% of the total NAV of units available. So are you surprised with the news that 80% of Malaysian who used their EPF money (compulsory retirement plan in Malaysia for workers, similar to 401k plan in US) to invest in unit trusts actually lost their money.

Now, you understand why all the bankers are making money every year regardless of the market. Can you imagine that you have entrusted your money to your 'friends' and hoping that they help you to get some returns and at the end of the day, they lose half of your money and the worst part, they are asking you to pay them some more because you are using their ' intelligence' to ' lose' your money in stock market/ bonds!

However, if you are lazy people and refuse to learn new thing, mutual fund is the ideal place for you to put money in long run. But I am always cautious about mutual fund, maybe there are a lot fund managers making money for you ( and making even more money for themselves) , there are also huge numbers of fund managers who do not make money for you! ( but they are still making money for themselves!)

When I stared my work about 4 years ago, I invested RM1000 after saving for 3 months( about US280) in one of the newly launched unit trust in Malaysia. After 4 years of waiting, they never announced any distribution ( dividend ) to me and the worst part is my investment is worth RM950 only nowa day ( plus 3-3.5% of inflation per year in Malaysia, I actually lost about 15% in that unit trusts in 4 years!). Recently I received their financial report about the fund, actually, they lost RM 32 million in previous year but we as unit trust holders still have to pay RM 3.2 million to the fund managers for their service!

If you are approached by an agent who promises one thousand and one things and tell you how good their mutual fund is, always remember my advice, read properly their prospectus and if possible, invest yourself rather than giving your money to them for them to help you to invest!

There are usually 3 types of mutual funds available in the market, high, intermediate ( medium) and low risk. A high risk mutual fund is a fund where the fund managers would put your money( remember 'your money' not their money')in investment vehicles such as stock market, hoping for higher returns. A medium risk mutual fund is a fund with mixed portfolios ( a combination of stocks and bonds) and usually they pay you certain income every year. A low risk mutual fund is a fund where all your money would be put in investment vehicles that pay you fixed income such as government bonds). You must remember that the agent always tell your that you need to ascertain your risk tolerance before deciding which type of mutual fund to buy because all these funds carry certain risk to your money. ( I always think that I am the one who takes out my money to invest and I have to carry some risks, the fund managers and the company never spend a cent to invest and they have "no risk", don't you think it is funny?)


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pass-MRCP said...

Thank you for your comments!