Low Risk, Low Return; High Risk, High Return?

People often say: “Low risk, low return; high risk, high return.” Is it a truth? Let’s us examine it through an example of the investments made shown below.

Fund CAT is the best performer in Malaysian Unit Trust (Mutual Fund) industry for the period of more than 5 years as per 23rd June 2006. In the stable of around 400 funds to choose from, whether it is equity fund, bond fund, mixed fund, money market fund and so forth, it is the fund that gives the best return to its unit holders.

Fund CAT performance from 25th June 2001 to 23rd June 2006 is 113.04% which translated into 16.33% Compounded Annual Growth Rate (CAGR). One should notice that 2001/02 was the most bargain market since 1999. When count from an inception date of Fund CAT, which is in 1999, the fund performance is 90.5%, which translated into 9.67% CAGR.

How about placing all investment in a single stock? Is it really a high risk investment? Take an example of RLQ. RLQ is a resource-based company and its core activities are in 3 categories, namely Marine Products Manufacturing (MPM), Crude Palm Oil Milling (CPOM) and Integrated Livestock Farming. In the same period, RLQ generates a return of 119.27%, which is 17% CAGR. Bear in mind that RLQ is not the best performer of the market. Furthermore, since RLQ main businesses are in resource-based industry, any negative happenings would have impact to its performance. In the period mentioned, RLQ experienced few incidences such as high price of raw materials such as soy bean meal and corn meal, 2 bird flu threats and tsunami which have a huge negative impact to its underlying businesses. Nevertheless, it gives a better performance compared to Fund CAT which adapts a diversification policy.

While at a glance, Fund CAT is a more low risk investment made since its investments are well diversified into various sectors, money market and cash. At the same time, investment made on RLQ seems pose a high risk to its investors since RLQ businesses are in resource based industry, meaning that any negative happenings in the industry would cause negative impact to RLQ bottom line and ultimately to its investors. Nevertheless, anyone who chooses either Fund CAT or RLQ as his investment would reap similar return to his nest egg. One should always remember that investment made through rear mirror would not guarantee his investment success. When an investment result is most of the time relied on capability of the investment manager, it is worthwhile to aware any changes in fund’s investment team members. They are the one who decide the investment result of yours.

Note: As we are investors with long term perspective, any investment with less than 5 years is meaningless. Thus, we only use investments with minimum 5 years period for comparison. Remember, investment is a marathon, not a 100 meter race.

Invest for Long Term??

Excerpts from: http://www.theedgedaily.com/

“The Malaysian equity funds have posted "respectable returns" over the mid- to long-term periods, the Federation of Malaysian Unit Trust Managers (FMUTM). It said based on Standard & Poor's report on the fund performance as at July 28, 2006, the average returns for Malaysian equity funds for the seven-year period was 24%, five-year period 56% and three-year period 26%.”

Period (year) 3 5 7
UT Return (%) 26 56 24
UT CAGR (%) 8.01 9.30 3.12
FD Return with 4% CAGR (%) 12.49 21.67 31.59

As we can notice from the table above, by placing your money in unit trust (mutual fund) investment for 3 years, the return for the period would be 26% and when it translates to Compounded Annual Growth Rate (CAGR) which is 8.01. Similarly, for the period of 5 and 7 years, the return is 56% and 24% respectively and for CAGR for both, the former is 9.30% and the later is 3.12%. What will you get if you place your investment in “risk-free” Certificate of Deposit (CD) or known as Fixed Deposit (FD) in English Commonwealth countries? With 4% return annually, the figure will shock us!! For the period of 7 years, this “risk-free” investment performs better than unit trust (mutual fund) investment with more than 7%. When handling your hard-earned monies on hoping for better value creation by those fund managers, it seems that they do not fulfill your hope and as they promise – create value to its investors.



While the promoters of the unit trust investment always brainwash us “look for long term”, “let professionals handle your investment” and so forth, the reality is so cruel – it creates no value at all to the investors for longer term. When the promoters once again claim for the “outstanding” performance for 5 years period, bear in mind that the period is started from the 2001/02 market where it was the lowest. The best fund manager is not who gets the highest return when it is bull market, it is who gets the best result when it is bear market. It reminds me once again a famous quote by Warren Buffett: “It’s when the tide down, only you know who is swimming naked.”

Capital Guaranteed Fund III

Previous posts on Capital Guaranteed Fund:
Capital Guaranteed Fund I
Capital Guaranteed Fund II

Everybody aware of inflation. Due to this animal, $100 we have after a year (FUTURE VALUE) will not allowed you to purchase a same amount product which is quoted in today price (PRESENT VALUE). Giving 5% inflation rate per annum, your $100 of FUTURE VALUE (after a year) will only allowed you buy a product which is quoted today at $86.38 (PRESENT VALUE). Thus, after a 3 years maturity period, RM 300 million of FUTURE VALUE is equivalent to RM 259.15 million of PRESENT VALUE!! With capital guaranteed capped at RM 300 million (FUTURE VALUE) after 3 years, it’s for sure fund could deliver their capital guaranteed even their investment result is poor. They are left with RM 13.21 million (RM 272.36 million – RM 259.15 million) to play around even their investment result delivered no result at all for the entire 3 years period! That’s a “SURE CAPITAL GUARANTEED, ZERO RISK” Investment!!

The calculation above is simplified to an illustration purpose. The assumption made is there is no return (0%) for entire 3 years period.



When fund tagged with “Capital Guaranteed”, it should at least preserve its fund holders’ value. This means that for RM 300 million (PRESENT VALUE), it should at least appreciate to RM 347.29 million (FUTURE VALUE) to align with its tag of “Capital Guaranteed”. If RM 300 million (PRESENT VALUE) remain as RM 300 million (FUTURE VALUE), it actually deteriorates its fund holders’ value at the rate of 5% per annum! What’s the point for investors to invest into these funds if it serves no purpose at all. After all, they could place their money into bank’s Certificate of Deposit (CD) or Fixed Deposit (FD) to enjoy “Capital Guaranteed, Zero Risk” return. Currently, a FD depositor in Malaysia enjoys 3.7% return per annum. So, with RM 300 million (PRESENT VALUE), his account balance will show RM 334.55 million (FUTURE VALUE) after 3 years. That’s almost 35% difference!

What You See Is What You Get? III

As you notice, the difference of BP-BP and ROI decreases when the investment period is longer. From the table, you will shock to notice that you actually incur loss of 5.28% if you cash out after a year of investment. That means if you invest $ 10,000 at the beginning and cash out after a year, you only manage to get back $ 9,472!!

How about the return for Certificate of Deposit (CD) or known as Fixed Deposit (FD) in some countries? Assuming CD/FD could give you 4% return per annum, the return over 5 years period would be:

Year 4% return per annum ROI (%)
0 1 0
1 1.04 4
2 1.0816 8.16
3 1.1249 12.49
4 1.1699 16.99
5 1.2167 21.67



When you compare ROI of Fund KSA and CD/FD, you will notice that ROI of Fund KSA only outpaces CD/FD after 4th year!! Amazing, isn’t it? When you pay hoping for get the better return as compared to “risk-free” CD/FD investment, the outcome is shocking. That is no wonder, the promoters always ask you to invest for long term – the longer the better. We do agree that investment should always for long term (more than 7 years). But, this only applies to the investment that creates value to its investors. If you choose a lousy investment, the longer you hold, the worse you get. Time is unemotional, it would not sympathize you because you choose a lousy investment. In fact, time would punish you if you choose a lousy investment. Time only reward to those who choose a good investment, this is the core of the value investment.

Next time, when the promoters of Mutual Fund (Unit Trust) try to persuade you to purchase the fund and show you how good the return, you should ask them one question: the return is on whose perspective, Fund or investor, that’s you who pull out the money to feed them.

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….

Dollar Cost Averaging (DCA)?

DCA gains its popularity especially by the mutual fund (unit trust) investors since it is promoted by the interested parties. What is DCA? One might ask. It is a systematic and regular investment of a fixed amount of money regardless of the price level, meaning that it does not bother the up and down of the market. Investor will get more units when prices are down and fewer units when prices are up.

The promoters claim that by adopting this system, it will reduce investment risk because the risk already averaging out. The most wonderful thing is it needs not your close monitoring to the market. Sound simple and great, isn’t it?

Before we jump into a conclusion whether DCA is practical is a real world or not. Let’s examine what’s your reaction for this scenario:

There are 10 different stalls selling local cuisine. You are having your dinner every evening and you have a freedom to choose which stall you will have your dinner. From the beginning, you might rotate your dinner among these stalls because you want to try something new and you want to know which is the best. After a while, you know exactly Johnny Stall is the best with a reasonable price tag at $ 10 for a dinner. You do not choose others because you know well that for some stalls, the foods might not fresh, the cleanliness of the stalls is not accepted and so forth. Thus, you will go to Johnny Stall for your dinner every evening.



One day, as regular as your previous evenings, you have your dinner in Johnny Stall. After dinner, you pull out $ 10 for the bill. Surprisingly, Johnny presents the bill with a price tag of $ 20! Being curious you ask him the reason. He answer: “I’m not in the good mood today.”

The next day, you go to the same stall and after a dinner, you pull out $ 20 for a bill. This time, Johnny only charges you $ 5.

After several times, you know well that Johnny stall’s dinner is the best and the quality remain the same. The only difference is its bill – it depends to the mood of Johnny. In bad mood times, he would charge you above fair value of $ 10 which can be as high as $ 20. While in his good mood times, he would present you with a same quality dinner but in discounted price, could be as low as $ 5. You need not be a rocket scientist to know when is the best time to have your dinner, don’t you?

We need to have a dinner every evening and thus we have no choice to pay for the bill asked by Johnny. But, for a rational intelligent investor, there is no timeframe for him to invest. It could be no investment made at all for the entire 5 years and when opportunities arise, there could be 5 or more investments made in a year. It all depends to the market – Market is your servant, do not reverse it.



By adopting DCA, it is just insane to invest in whatever price tag. When in real life, you definitely would not buy something when the price tag is far beyond a fair value, will you do it in your investment? When promoters claim that by adopting DCA, it reduces investment risk, so does the return rate of the investment result.

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.

Mutual Funds @ Super Highway

Article by Louis Lowenstein about the turnover rate of the mutual funds (unit trust).

Have you ever care about how fast your fund managers changing their portfolio? The answer? 100% and for some even as high as 305% per year!! What is this means? That means holding period of the portfolio is less than a year (100% per year) or less than 4 months (305% per year)!! While purchasing the fund, the promoters always tell you “invest for long term”, at the same time, they are doing the reverse. “Long term” by their definition seems less than a year from their action.

In any business, a period of a year seldom gives you a clear picture of how a company performs. In such a short period, very often the performance of the company is merely a luck. If the company delivers a handsome result this year, you can’t just assume the same result will repeat for next years. For example, in 2004, steel production companies enjoyed a handsome result but the reverse happened in 2005.



The high rate of portfolio turnover by fund managers only indicates their speculative mentality. They try to time the market and most often they are wrong. When the management fee is tied to the size of the fund and their net worth is not tied to the fund they manage, there is no wonder why irresponsible action occurs.

The funds managed by managers with speculative mentality would only deliver a poor result to their fund holders. The result could be as wide as 18% per year over the period of 5 years as compared to value-oriented funds. With compounded effect, if you invest $ 10,000 and the difference is 18% per year, see the difference:

Year Value Fund Speed Fund Difference (%)
0 10,000 10,000 0
5 22,878 10,000 129
10 52,338 10,000 423
20 273,930 10,000 2,639
30 1,433,706 10,000 14,237

Will you invest in Speed Fund anymore??

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.

Woodpecker and Snake

Woodpecker builds his nest above pines tree. You may wonder why pines tree but not other type of tree? There is a reason behind it. Snake is a predator of the woodpecker eggs and it seems it is easy for snake to climb the tree to catch the eggs. In order to protect his progeny, wood pecker must select a place where he can safeguard his progeny. Pines tree secret resin, which is an irritant to snake. Whenever snake tries to climb over tree to catch the eggs, he would end the up with a failure. This is because whenever snake climbs the tree, along the way, he would suffered from an irritation from the tree resin. Because of the irritation, the snake will fall down from the tree half way before he manages to catch the eggs. That’s the smart way of woodpecker to protect his progeny.

In the investment world, the naïve investors are similar to the greedy snake. Whenever there appears an “Once in a life time opportunity”, they will flooded to it. The promoters of the “opportunity” definitely will tell the investors how lucrative the investment and best of it, it appears “Zero Risk, Capital Guaranteed”. In order to lure the investors, they will equipped with big titles such as managed by world renowned fund managers, backed with hundred years history banks and so forth. Because the titles are so big and glamour, the investors entrust their money and invest to the so called “Zero Risk, Capital Guaranteed” investment. Keep in mind that the hundred years history bank does not equivalent to hundred years of successful fund management. If you really look deeply, you will find out that the bank nowadays acts more like a financial supermarket: they sell you everything, from A to Z. Housing loan, business loan, credit cards, machinery leasing, mutual funds….etc. When you really examine their performance of the fund they promoted, it seems that majorities of them not only do not preserve the capital of the investors but deteriorate it. While the objective of the investment should always be first preserve the capital and second for capital appreciation, they deliver the opposite result. When asking why they deliver such poor result, they will blame to external factors such as high fuel cost, Tragedy 9-11, financial crisis and so forth. Seem that their poor performance is none of their business. True, those crisis and negative events happens all the times: in the past, present and for sure it will continue in the future though the theme might different, so are these fund managers telling you that the fund performance will continue perform poorly in the future? If so, why selling the funds promising the investors how good the potential return in the first place? Why they still enjoying handsome paid while fund continue perform poorly?

To be a snake or woodpecker is your choice. To be a snake looking for quick and easy profits is dangerous. After all, life is never easy. Life is not a story book, it is a reality.

Technorati Tags: Investment, Mutual Fund, Unit Trust, Woodpecker, Resin, Pines Tree, Zero Risk, Capital Guaranteed, 9-11

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….

Technorati Tags: Investment, Mutual Fund, Unit Trust, Professional, Peer Pressure, Ego, Play Safe, Ego, Ivy League, Long Term Capital Management, LTCM, Nobel Prize, Warren Buffett, Sales Load, Management Fee, Trustee Fee, Man, Money

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.

Technorati Tags: Investment, Mutual Fund, Unit Trust, Asset Based Commission, Sales Load, Net Asset Value, NAV, Equity,

Is Mutual Fund a Good Investment? I

Before we jump into a conclusion, we should examine how’s Mutual Fund (known as Unit Trust in English Commonwealth countries) works.

Promoters and salesmen for the mutual funds are very friendly, some even hire only pretty ladies or handsome guys to lure the investors. This is not a bad thing since every one likes beautiful things and people. Everyone likes to be pleased. Remember when you shop in the jewelry shop, whatever you choose, you will be praised by the salesmen that your taste is very unique – that gives you an impression that you are the only one in the world, you are superior. Because of the feeling, it is naturally that you would pour out money to buy the jewelry. Whether the praise mentioned by the salesmen is truth or not is not important. After all, what lies in the salesmen mind is to sell you out the jewelry and earn the commission.

Business is business and for sure there is no free lunch in this world. Everything incurs cost. By setting up a fancy sales booth, hiring friendly yet pretty sales people, or even drives directly to your house or office to promote his funds all incurs cost, being it directly or indirectly. People naïvely think that it does not cost him single cent are doomed to be manipulated. While it is legal and makes sense that business needs to earn in order to sustain its operation, it is VITALLY important that the place you invest should at least protect your asset value for the first place and then enhancing its value for the later part. If the investment you made could not meet its first role of protecting its value, not mentioning of enhancing its value, it is worthwhile thinking of whether you make a sound investment or not. The case is worse if the investment you made not only does not protect its original value but bring you a negative value.

The problem lies in the mutual fund industry is its management fee is based on Asset Based Commission (ABC). That means no matter what’s the performance of the fund, being it good or bad, it will deduct 1.5% of the ENTIRE NET ASSET VALUE (NAV) of the fund. Put it an example, say Fund JKL NAV is $1 billion. Thus, at the end of the year, the fund manager will deduct 1.5% of NAV, that’s $15 million from the fund as management fee. Whether the fund performance is positive or negative is not the prime consideration. It is no wonder fund managers are looking for the biggest fund – the bigger the fund, the more they earn. This problem happens in almost every industry where the managers manage Others People Money (OPM) and this scenario is known as Owner-Agency Conflict.

How to prevent us from falling prey into this Owner-Agency Conflict? First of all, ask yourself what’s the objective of the investment you made? To please someone? Cannot resist because of pretty ladies or handsome guys persuasion? Or to create value to your asset? If the answer is the latter, then you need to choose carefully your fund manager. He should be the one whose his management fee should be Performance Based Commission (PBC) rather than Asset Based Commission (ABC). If his performance is poor, there is no reason he still receiving a handsome pay check. On the other hand, if he delivers, we should share some of our profits with him. Doesn’t it fairer?

Technorati Tags: Investment, Mutual Fund, Unit Trust, Asset Based Commission, Performance Based Commission, Net Asset Value, NAV, OPM, Owner-Agency Conflict

Conventional Wisdom II

2) Equity is risky

The risk is always there. The most dangerous risk is not outline externally, but internally – that’s when you are ignorant.

People been brain-washed by their parents, peers, media….etc. Often, people telling you who is bankrupt because of his failure in equity investment while the media especially those producing drama or movie features a character jump down to the street after he lost all his investment in equity market. There is no surprise for such scene – after all, if the story is not as hot as this, will the film attracts people to pour out money and buy a ticket to watch it? This is the perception we got about equity market – IT’S VERY RISKY.

The perception we got sometimes does not represent the reality. As far as Great Depression 1929, there were no people lining up to conduct suicide because of the crash, though there were many people laid off because of high unemployment rate.

Another cause people have a perception of equity market is risky is because they hear or see the equities they bought plummet like a falling stone. The problem underlying here is their attitude rather than the equity is risky. When you act like a person in Las Vegas betting for his fortune in a casino, that’s buying something that you do not understand or even care to understand, this would put you in a risky position – no matter what you invest, being it equity, commodities, real estate and so forth.

If you really do your homework – studying an equity that you intend to invest deeply, I see no reason why equity is a risky investment. Of course, this also depends on your firm character, knowledge and experience as well. In every market, there is no lack of predators waiting for the innocent and ignorant lambs to become their dishes. By investing in the largest, well established bank-backed funds does not mean it will give you a superb return. The ugly part in fund managing industry is sometimes your interest does not align with their interest. If this happens, whose interest your fund managers will protect? You? Or their boss? That’s why I always I advise people if you really want to invest, no matter in equity, mutual fund (unit trust in Commonwealth countries), commodities, real estate….etc, first thing first you need to do is to have Firm Character, followed by having vast knowledge and with ample time. If you have all three, congratulations! You are the one who decide your own fortune and I see no reason why you could lose out to others in the long run. If you do not posses ALL, yes, I mean ALL of this, the best thing you could do is to find out the person who has ALL of it. But, be careful that the person you choose must posses another trait that is VITALLY important when managing others people money (OPM) – INTEGRITY.