What You See Is What You Get? II

When mutual fund (unit trust) shows its performance, it is in Bid-to-Bid performance. For example, when it shows 10% return per annum, it indicates 10% return per annum of its Bid Price, ie: Bid Price on 2nd January 2007 is $ 1.10 as compared to Bid Price on 2nd January 2006 of $1. Bear in mind that return on Bid-to-Bid is NOT Return On Investment (ROI) of the unit holders. Let’s consider 10% Compounded Annual Growth Rate (CAGR) where Fund KSA managed to achieve for 5 years, what will the investors get if he decide to cash out at the end of 5years:

Year OP ($) BP ($) BP-BP (%) ROI (%) Diff (%)
0 1.0000 0.935 0 0 0
1 1.0835 1.0131 8.35 -5.28 NA
2 1.1740 1.0977 17.38 2.63 561.09
3 1.2720 1.1893 27.20 11.20 142.83
4 1.3782 1.2886 37.82 20.49 84.61
5 1.4933 1.3962 49.33 30.55 61.48



John invested $ 10,000 at the beginning of 5 years period. He does not cash out until the end of the period and at the same time, he reinvested all dividends. After 5 years period, Fund KSA announces that it achieves 49.33% return (that is in term of Bid-to-Bid). When John sold all his units, he found out that he only manage to get $ 13,055 (1.3962 * 9,350 units) instead of $ 14,933. His real Return On Investment (ROI) in term of investor’s perspective is 30.55% instead of 49.33%, which is 61.48% difference. You might ask where is the money gone? Remember, there is always costs involved to feed the interested parties, ie: 6.5% Sales Load and 1.5% Annual Management Fee.

What You See Is What You Get? I

Whenever someone makes an investment, being it in equities, mutual fund (unit trust), real estate and so forth, his objective is to maximize his Return On Investment (ROI). In Mutual Fund, a conventional belief of its return is around 12% per annum. An outcome of the investment return will varied depends on different strategies employed by the investors. Bear in mind that in mutual fund investment, there are 2 typical charges, ie: Sales Load which hover around 5 to 6.5% and Annual Management Fee at 1.5%. Whenever we look at the table of the mutual fund, there would be 3 columns, which are Offer Price (OP), Bid Price (BP) and Net Asset Value (NAV). The difference between OP and BP constitute Sales Load. To make a picture clearer, let’s show you an example.

John invested $ 10,000 in Fund KSA on 2nd January 2006 at OP of $1. With this, he will have 9,350 units of the fund (Note: 6.5% Sales Load). After a year, Fund KSA OP is at $ 1.20. At a glance, it shows a return of 20% per annum. Quite impressive with this return rate. If he sold all of his 9,350 units, he will get $ 10,333 (9,350 * $ 1.10517). Instead of the 20% return, he only manages to get the return rate of 3.33% of his original investment. Playing magic, huh? Sometimes, what you see is NOT what you get….

Mutual Funds Hopper

In the job market, the objective of a job hopper is to gain more benefits compared to his previous job. Will he achieves his objective? It depends to his luck as well as his capability. How about mutual funds’ holders? Very frequent, either by his own judgment or persuasion from the interested parties, the holder changes his portfolio from Fund A to Fund B and so forth. The objective is similar: to gain more. But, will he achieve his? The answer: SURE LOSE GAME.

The answer is very obvious since there are underlying costs involved in the mutual funds, ie: Sales load and annual management fee.



Take one example: Johnny invests $ 10,000 by his own for the beginning and let the capital and its return compounded yearly. The investment return is 10% per annum. What he gets after 30 years patience? $ 174,494. How about Ken who also invests $ 10,000 in mutual funds for the beginning with same return rate but he changes his portfolio every year, meaning that in 1st year, he is in Fund A, 2nd year in Fund B, 3rd year in Fund C and so forth? Waiting patiently for 30 years as Johnny, what will he gets? $ 23,234!! That is a difference of $ 151,260 or 651%!! The more or longer Ken invests, the more he loose out from the game.

Why there is so much difference? That’s because of Sales load imposed by Mutual Fund to its holders. The Sales load is ranged from 5 to 6.5%. Its existence is to channel to its promoters, so that the promoters can put efforts to sell the products. Remember whenever you intend to purchase mutual funds, there are flocks of difference salesmen come to your place and tell you their funds are the best and persuade you to invest on them? That’s the cost of doing business – there is no free lunch in this world. If there is no incentives for these promoters, who will sell hardly for the fund?

Bear in mind in the example given, we do not include a typical 1.5% annual management fee. If we add it into the example, the difference will be larger.

Fund of Fund(s) (FOF)

Finally….after been in the market for quite of time in western world, especially US, it reaches to Malaysia, a relatively new market of fund management -- Fund of Fund(s). News clip of FOF, click here.

What’s Fund of Fund(s) (FOF) is all about? FOF is a fund invested its money into another mutual fund, in contrast to the conventional way, where mutual fund invests directly in equities, commodities, currencies, bond and so forth. When its conventional peers need to stretch their head to find out the best investment opportunities, FOF need not do so. What FOF needs to do is to find out the best mutual fund and invest on it.

What’s the benefits could investors gain from FOF? If we link a relationship between investment products (equities, commodities, currencies, real estate….etc) and investors similar to manufacturer and end user, then mutual fund (unit trust) role is like a retailer. When the products passing on from one level to another level, there is a cost of conducting business. That’s why mutual fund charges its investors sales load (5 – 6.5% of initial investment value), annual management fee (1.5% of NAV) and so forth. What happen if there is another level on top of retailer, ie: distributor? Put it an example, how much you pay for your airline ticket if you book directly from the internet compare to the one you buy from an airline agent?

Besides creating extra cost of business which is ultimately passing on to its end user, I see no value in the perspective of investors for creating another level. Of course, if you are a promoter or interested parties of these funds, there is another story.

Capital Guaranteed Fund II

In Malaysia, typically fund will charge 5- 6.5% of fund’s Net Asset Value (NAV) as sales load. That means $100 you invested, only $95 - $93.5 is invested for you by fund managers. The remaining $5 - $6.5 is paid to their sales force and admin fee. Thus, by investing in the fund with same amount compared to the one, John who does it by his own, to achieve same result after a year, say 10% return of $100 investment, you need not 10% return but roughly 16% return! Table illustrates the scenario:

John $100 $110 10% annual return
You $95 $110 16% annual return

It likes a 100m race where John starts at 0m but you start at -5m and assuming both of you have similar accelerating power, who will be the winner is no doubt in question.

Second part of income generated for fund management is through management fee. In Malaysia, typical rate is 1.5% NAV per annum. Putting DUT Fund as an example, with RM 300 million at the beginning of the year, assuming there is 0% return at the end of the year, its NAV will be RM 285 million (RM 300 million – (RM 300 million * 5%)). Thus, its first year management fee would be RM 4.275 million. What’s the management fee for the remaining 2 years? RM 4.21 million and RM 4.15 million. Total management fee for entire 3 years is RM 12.64 million. Good business, isn’t it? At least for the fund management. What’s investors get after 3 years maturity? From RM 300 million at the beginning of the fund launching, investors left with RM 272.36 million (RM 300 million – RM 12.64 million – RM 15 million).

You will wonder why investors left with RM 272.36 million while at the same time, the fund is guaranteed for its capital of RM 300 million? That’s the difference occurs when we are talking about PRESENT VALUE and FUTURE VALUE.


To find out PRESENT VALUE and FUTURE VALUE, click a link below:
Financial Calculator

Is Mutual Fund a Good Investment? III

Mutual fund promoters always highline the fund is managed by professionals. The first impression you get when you talk about professionals is they are truly professional, meaning that they are devoted their time for the fund management as well as they are equipped with necessary knowledge and skills. This should at least beat down average Joe result in the investment. But, the impression we get not always represent true reality. Checking back to the history and you found out that they are so many fund managers who do not perform, not even by laymen in the street. The reasons? There are too many and I just want to highlight few.

1) Peer pressure
There are 4 variables for the investment results and its outcomes:
i) You are right, others are right: that’s great! You deliver the results as expected.
ii) You are right, others are wrong: that’s even superb! You are among the top of the tops who delivers superior results.
iii) You are wrong, others are wrong: hmmm….. because of unforeseen circumstances such as 9-11 Tragedy, Hurricane Katrina, Tsunami…etc that could not be avoided, thus, delivering the poor results. Since everyone delivers same poor results, no one will blame you.
iv) You are wrong BUT others are right: oooooops…. That’s disastrous. Why you deliver such poor performance while others could deliver a handsome return? Everyone pinpoint at you and you are no way to hide because figures show everything. How? How do you avoid such phenomenon?

If you are the fund manager, which one would be preferred and which one you try to avoid far away? Since the management fee is not based on performance merit, isn’t it PLAY SAFE a better idea? If I could deliver a handsome results, that’s the desired outcome. But, if to deliver such results posses a risk of delivering a poor result compared to others who don’t, I’m better protecting my position first. After all, management fee is sure thing while to be a super star might risk me losing out my rice bowl!

2) Ego
Many fund managers are graduated from Ivy League. They are full of titles and they might be a Nobel Prize winner as well. Take an example, 2 Nobel Prize winning economists with other elite academic traders manage Long Term Capital Management (LTCM). Even with so many highly educated and intelligent people, the fund still failed. As mentioned by Warren Buffett, to ensure a successful investment result, you do not need a rocket scientist, but a Grade 6 mathematics with a rational business thinking.

Next time, whenever mutual fund salesmen try to persuade you to buy from him, ask him about Sales Load, Management Fee, Trustee Fee and so forth and their impact to your investment result. Are they care about the impact? How about their net worth? Are their majority net worth placed where they promote? If not, then why? All in all, is up to you – what’s your objective of your investment in mutual fund? To please somebody, buy it because of relationships, such as family members, friends or colleagues? Or because you really look for the one who could preserve your asset as well as creating value for you? After all, it’s your money and it’s your responsibility to take care of it, if not you, who else?

“Be a man. Place your money where’s your mouth is.” This is what I want to share with all fund managers….

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Is Mutual Fund a Good Investment? II

People tend to think that their investment made in mutual fund is 100% of their money invested. This assumption is totally out of the reality. In real life, what you invest is lesser than the money you pour out. This means when you invest $10,000 in SDF fund, the money managed by fund manager for the investment purpose is not $10,000 but lesser. You would be amaze and ask if it is not $10,000 then how much is really for investment purpose?
People invest in mutual fund should be aware there are 2 different prices, ie: selling price and buying price similar to currencies exchange rate. The selling price of the fund is ALWAYS HIGHER than buying price. For example, selling price is $1 while buying price is $0.935. What is this means? That means fund management sold you the fund for $1/unit and if you decide to sell it back to them (providing there is no fluctuation of the prices), you only get back $0.935. Say, if you bought the fund for $10,000, then you will only get back $9,350. Where is the remaining $650? Evaporate in the air or taken by the Martians? Nope, that is the cost paid to the pretty or handsome guys who persuade you to invest in his fund, the fancy sales booth….etc. The difference of the prices is called Sales Load.

What’s the impact of Sales Load and management fee (note: mutual fund normally incurs 1.5% of NAV as yearly management fee) to your investment in the long run? It’s huge! Let me show you the example. There are 2 investors, namely, John and Tom. John invested his money amounting $10,000 in SDF mutual fund while Tom invested his money, same amount as John directly to equity market. Assuming both investments bring them same return rate, ie: 12% per annum. What’s the end result after 10, 20 or even 40 years?

Year 0 Year 10 Year 20 Year 30 Year 40
John: $10,000 $24,966 $66,665 $178,008 $475,315
Tom: $10,000 $31,059 $96,463 $299,599 $930,510

As from the table shown, the difference of investment result for John and Tom in term of percentage after 10, 20, 30 and 40 years are 24.41%, 44.70%, 68.31% and 95.77%. This means, although the return rate for both are same, ie:12% per annum but after deducting hidden cost by mutual fund, it brings a disastrous result to its investors. As you notice, the difference could be as huge as double after 40 years!

Please bear in mind that the calculation is based on consistent 12% per annum return rate. The difference could be further if in particular years, there are negative return rate. Remember that, mutual fund management fee is Asset Based Commission (ABC), which means no matter how’s the performance of the fund, 1.5% of the ENTIRE NET ASSET VALUE will still deducted from the fund. What do you think about your fund manager performance? Do you believe they are so superior that they could register consistent high, positive return rate for you in the long run, ie: 40 years? Or is it makes sense that they somehow might make some mistakes and bring negative return to the fund? How about switching from SDF fund to ASD fund, you might ask. It is truth that this is what people normally act if one fund does not perform, they will switch to another fund. My answer? Unless you are sure the fund you switch to is by high probability they are superior than others, otherwise, don’t do it. The reason? SALES LOAD.

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