Financial Freedom SG

Having established that stocks is the way to invest, some people may say that they will invest in shares themselves. Some will also say that they can make up to 50% or more in a day trading penny stocks so why should they pay a fee to let the investment fund manager earn a commission?

The key is that Mutual Funds or Unit Trusts are what people in the industry term as collective investments. This means that funds are collected from a big pool of investors managed by a team of financial professionals who will plough these into different stocks/bonds/cash deposits to earn a return. The first key advantage is that these people are paid to do nothing but monitor these different investments that they have made in the fund and either load or unload these investments according to the guidelines set by the fund house or the investment team. So this means that they are always looking at the market prices of the various investments for any changes whereas the investor may be working at his day job or even be on a holiday and cannot monitor his or her investments.

The second advantage that a fund manager has over a typical investor is that because of the large amounts invested by many investors, it means that the fund manager is able to have the pick of the best blue chip companies to invest in, and typically the manager will invest in a few of these companies. However, the typical investor may be financially strapped to try to buy into a few blue chip companies. So, the fund manager is able to share the wealth that a good blue chip company generates. For example, a typcial Singapore investor may find buying Singapore Airlines, DBS, UOB and Venture a tall order because of lack of funds while the typical American investor may find just buying Google, Berkshire Hathaway, Citicorp etc financially taxing. So the way out will be to buy into a fund that has most of these stocks.

The third advantage of these funds is that since they have a team of people looking at the investments, they are less prone to falling for the psychological trap of greed and fear that was mentioned in an earlier post. Any buying or selling of investment is taken as a team and will fit the specifications mentioned in its prospectus. And since they are a team working together, there is also people working hard at analyzing the different stocks and checking into the management of the company its prospect and will even including interviewing the management of the company to find if they are comfortable to invest large sums into the stock of the company. This are all what a typical investor is unable to do on his or her own.

The fourth advantage of a mutual fund is that they are good tools for diversification. What is diversification? Very simply, it is a process where the risk are spread out so that in theory if one stock goes up the other goes down(hopefully by not as much as the share going up) and vice versa. This will erode the earnings one can make by just investing in that one share that is going up but it will also help investors minimise the losses they will make when they have a diversified holding. I will try to post an article about diversification in a later article soon.

Also, there is a mind bogging amount of funds out there, from country funds to regional funds to sector funds to bond funds to insurance linked funds etc etc. Just choosing one fund is enough to make your head swim. While it is important to note that the fund of the year (ie best performing fund of that year) may not be the best fund next year and so it could be better to invest in a fund that is not performing so well, on the other hand, it could be that the fund manager is not as good as the first one. So it is important to check around and also ask from different people about funds they have invested and what their historical returns are like. Another good way is also to check the prospectus carefully to see their investment philosophy and whether the fund manager constantly changes the holdings of the fund (expenses will be higher as they have to pay commission to the broker just as you would have to pay for brokerage- however, they pay a small percentage because they buy large amount of shares).

The catch of investing in these funds is that they have expenses which comes to the investors in the form of annual management fees and also either a front end load(sales commission) or a fee upon the sale of one's units in the fund. And a fund is still subjected to the same market fluctuations as stocks but the variance or deviation is not as large so the principle of dollar cost averaging can also apply here. So it is a good hedge if you buy a lot of shares yourself. It maybe a good idea to get a fund that is outside of the market you invest in, so that the risks of your investment portfolio is reduced.