Tuesday, December 17, 2013

Does Mutual Funds or Unit Trust Makes Money?

Everyday more and more "financial advisor" on the street wanted to sell you a fund. I am sure everyone of you are being sold one or another kind of funds. And these funds seller will always have the same claims.

- They give you the history performance of the funds showing how the funds perform over the span of 3 - 5 years
- They said that investing on your own need a lot of time and knowledge in which they have all the professionals to do it for you
- They claim that the fund is a fight of inflation and if you put your money in the bank you will see your money devalued
- It is easier for the funds to invest because they have a lot of funds and can diversified the risk compared to you investing alone with your little money

So the big question is do we trust them? Can an average person really trust a the fund manager to invest your money? 

The answer is yes and no. 

It is true that the fund can easily invest compare to an individual / retail investor and this is because they have larger funds. But this only happens when they really have larger funds. More often when a new fund (this also happen to older fund) is set up, they only have limited amount of fund because there are less investors investing in these fund. This resulted in a smaller group of investor sharing the fixed cost of the funds.

Cost Involved in a Funds
  1. There are many cost involved in setting up a fund. First there is a trustee fee that the fund needs to pay a bank who oversee their account (the account where they place all the invested money), the fee range from 0.5% to 0.8% or but it also have a minimum fee to pay. Imagine if the account is RM100,000 and 0.5% trustee fee is charged on the account and a minimum of RM2,000 is to be paid for the fee. 0.5% of RM100,000 will be RM500 but you need to pay RM2,000 because that is the minimum fee charged for managing your account. Now your trustee fee increase from 0.5% to 2% (RM2,000 out of RM100,000). 
  2. Secondly, a fund involved management fee in which these fees are paid to the fund managers for managing the funds on your behalf. These fees range from 1% to 2% of the funds. If you know that the fund manager is really capable to earn you a profit of 8% - 12% average and giving them 2% will be relatively small but please consider this. A fund manager does not just manage one fund. They manage multiple funds across in their company and by managing so many different funds it does not just make them lose focus but they are also charging the same 1% - 2% of all different funds they manage. Management fee is charged to you regardless of whether the fund is making a profit or making a loss. If the fund performance is 2% and the management fee is 2%, the fund manager successfully making a 2% profit out of your money without helping you to make any money at all. 
  3. Performance fee is another cost to you as a unit trust investor. Performance fee is charged when they make certain percentage of profit. Some funds charge you 20% out of all the profit they make. This will potentially reduce most of your profit generated from the funds.
Now that you understand the cost of a funds. Can you still make money out of investing in a fund? 
I can say it is still possible to make money out of unit trust or mutual fund but you need to know exactly what time is good to invest and learn to look at the details of the fund. 

Know About the Timing
If you invest during a peak of any market, then there is no room for the fund to grow further. Since most of the fund investors are those people who do not have the time to monitor, it is a difficult talk to check what happen to the fund. So what you can do is to monitor the market as a whole. A very minimum you need is to know whether it is a good market to invest or a bad market to invest.
A down trend market definitely is not a good market to invest as we have no idea how low the market can goes. However once it turn higher and higher after hitting the bottom then it is a good time for us to slowly place our money in these funds.

Knowing the Fund Manager
Read more about the fund manager and company. A lot of time the fund shows a list of people who manage the fund in their fund fact sheet. But I personally know that in most cases the actual people that manages the fund are not on the fact sheet, they funds company just wanted to impress you by placing those people with a lot of experience in their fact sheet and there is no control at all because there is no governance over how they manage your funds. This is something that you have no control but still, look at their funds closely on performance during good market and bad market. 

It is still advisable to only treat unit trust and mutual funds as part of your investment basket and not your whole investment portfolio. A lot of investors will find that 90% of the funds in the market do not make any profit (if not losses) and even if they do make a profit they may not be able to give you a lot of return (unless you invest during a good timing).

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Sarah Franks on December 19, 2013 12:41 AM said...

A lot of Financial Planners will take your money and spit it out the window. So we gotta be careful not to mess up and choose a shady character. I found an article that talks about how to "rank" a planner so that your not roped into something bad. You can find the article at http://www.mutualfundstore.com/planning-and-retirement/develop-and-maintain-your-plan/choose-your-advisor