Wednesday, July 19, 2006

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.

No comments: