Sunday, October 12, 2008

Mutual Fund - service charge

Equity Mutual Fund is a fund that invests into stock market directly, usually either to (1) gain maximum capital appreciation or (2) receive constant dividen payout as an income.

The standard advice 
is to read the prospectus, understand the purpose of the fund before buying it.  Public Mutual is the largest private mutual fund company in Malaysia and this is a sample of prospectus.  All the important stuff are highlighted at the top.

First thing that put people off is the varies charges and fees.  The biggest chunk is Service Charge at about 5%.

Because I put mutual fund in between Fix Deposit and Stocks in my pyramid, I can compare mutual fund with either FD or Stocks.

Mutual Fund vs Fix Deposit

The way I understand bank is they promised me a FD return and then use my money to earn a bigger return.  But bank does not disclose how much their cost is.  So if mutual fund is doing the same as what bank does, and if they disclose 5% as their 'cost', its ok for them to charge me 5% as long as my final return is larger than FD.  

My FD return now is 3%.  So if they charge me 5%, then their fund return should be AT LEAST 8%.  So I browse each and every fund for their past 1 year return from this link.  

Unfortunately a lot of fund shows a huge drop in late May and I don't really know why.  Before I find out why, I also decided I should look for one fund that is as steady as FD and should have a Always Up trend.  ( a new requirment I add after I browse these graphs )

Finally I found one, like below.

So this seems like one mutual fund that I can use to replace my Fix Deposit.  From the chart itself, it seems like despite the current market down turn, its producing 50% return for the past 1 year.  So I would consider this to replace my FD.  

Mutual Fund vs Stocks

My stock invesment is charging me 0.7% each time I have a transaction.  Meaning each time I buy and sell a stock, I am charged 1.4% of its average price.  Mutual fund charges me at 5% which is quite high.  However, if I buy sell 4 stocks, then the total charges I have paid is 5.6%; which is quite equivalent to the charges I paid to mutual fund.  So if I can find one mutual fund that already invest into 4 or more stocks that I am interested in, then its worth while for me to buy that mutual fund, else I will pass.

Like wise, the factor is 4x.  Says if my normal stock investment practice is buy and sell within one year, then the only time I would buy that mutual fund is if I plan to keep that mutual fund more than 4 years.  On the other hand, if I buy sell a stock more than 4 times a year, then it may be worth while to buy the mutual fund and keep for one year instead.

So finally I come up with a formula for myself about mutual fund investment as an alternative to stocks, for my own portfolio :

Basically the formula says, instead of me buying and selling many stocks many times, I may as well leave it for the fund manager to do it.  The 5.5% charges is relatively low IF compare to my large number of transactions.

Like wise, if I am interested in one particular company and plan to buy its stock to keep for life, then I should NOT consider mutual fund at all.

I have 2 sets of stock invesment account, (1) one is long term where I plan to keep them forever, (2) the other is where I 'play' with the speculation using all kind of methods.  Account (1) has nothing to do with mutual fund.  But I use a lot of mutual fund as the 'base' for my Account (2).

In Account (2), one month alone may already have more than 20 stocks transations.  So the 5% charges in mutual fund does not really bother me that much relatively.

I also have many mutual funds before I learn to buy stocks and started my own businesses.  Most of my mutual funds are more than 15 years old.  So 5.5% / 15 years = 0.367% per year.  Agains, doesn't bother me that much, especially when I don't need to do anything about them - a passive generator.

When I was shopping for what mutual funds to buy, I also learn that buying mutual fund means buying an industry.  For example, I know that    - h a l a l -   business in Malaysia is a good business in the sense that they will produce good income regardless, due to varies specific reasons including the unique economy policy.  I personally pursue for absolute freedom in open market so I do not really support those policies.  Hence I really have no interest to learn nor understand those businesses.  As a result I will not be able to buy those stocks with informative decision.  But I do have the 'general' idea that they will earn money despite the market fluctuation.  So Ittikal fund is one of the biggest portion in my portfolio for the past few years.

When I have some GENERAL ideas 
about an industry or a trend 
but I do not have interest
to learn the details
I choose a mutual fund
that matches my GENERAL idea.

And personally I do not mind paying someone 5% to help me check if my general idea is correct or not, for the next 5-10-20 years.

Note :  Not all mutual funds are charging 5.5%.  Some are lower than the others.  You may shop of cheaper fee mutual fund but I don't really recommend that.  Because when a fund manager is using 'lower fee' to attract investors, that also implies that fund manager has 'no confidence' that his portfolio can do better than the other fund managers.  If he is 'not sure' about his return, then most probably he is more speculating than performing fundamental invetments.


Anonymous said...

A really good post about mutual fund that boost my confidence in mutual fund.. Few questions, hehe..
i) mutual fund = unit trusts right??
ii)mutual fund is usually meant to be kept for a few years before selling to get more money??
iii) the graph for mutual fund seems to be going down but that goes for the whole stock market so cant judge mutual fund oerformance based on the current graph??
iv) where to find information regarding the number and type of stocks bought by the mutual fund?? something like a website to compare between mutual fund before approcahing the bank for information..the website about the graph is really good to see the performance

Mt. said...

in malaysia mutual fund = unit trust yes

generally mutual fund agent will tell you to keep for 3-5 years.

in a down trend, a good mutual fund should drop LESS than the index ( of whatever that mutual is comparing with )

interim and annual report of the fund will have these info.

Anonymous said...

Hi, my sis is working in public bank, she has the privilege of waving the service charge of public bank funds. Should I consider public bank funds over other banks? Plz advice. TQ!

Mt. said...

oh yes absolutely ! if everyone else are paying 5% extra and you are not, then you are already 5% ahead of others at the beginning !!

However I just want to point out that public bank funds are different than public mutual funds.

Anonymous said...

Thanx for the speed response. May I know wat is the diff btw the public funds n the public mutual?

Mt. said...

Public Bank and Public Mutual are 2 companies in the same Public Group.

Public Bank has its own mutual fund and those are different than Public Mutual funds.

So if your sister working in Public Bank and has special discount in the service charge fee, its a good deal for Public Bank Funds. But sometimes Public Bank Funds may or may not have good funds comparing to other funds that may suit you more, ie. Public Mutual.

You will have to do some calculation to determine how much these service charge saving will bring you in long run. If this is confusing then just pick an index fund :) meaning this fund will follow market's KLCI.

Kris said...

There are cheaper alternatives other than public bank. It is good to diversify. Nevertheless, during a bull market (5-6 years from now) a majority of mutual funds will start to be profitable. The only difference is how much they profit if you compare one companies's range of product.

CIMB's product range is quite wide and the service charge is damn cheap.

See here

P.S The above is not ad for CIMB. I do own Public Mutual funds also as you can see from my posts.

Mt. said...

thanks for the tips, cimb has good link with our new PM, they will continue to be hot choices for the next 2-3 years at least.

Anonymous said...

Hi, is mutual fund different from index fund ?

redz dwen said...

Hye..i would like to know a comparison between cimb mutual fund and jupiter online. Need some advise..thanks.