Thursday, July 16, 2009

Why so many hates & loves with mutual fund ?

When the series of mutual fund articles were initiated, a lot of contradictions are raised. Some are intended and some are not. Here are a list of them in respond to Mutual Fund is the Highest return Passive finance tool, Don't Buy Low Sell High in mutual fund ?
  1. Fund managers are incompetent
  2. The only people who gest Rich are those agents, not the investors!
  3. mutual fund fee 5-6% are terribly HIGH!
  4. mutual fund returns are LOW!
  5. mutual fund is NOT a PASSIVE investment, you may as well buy stocks!
  6. Buy Low Sell High is applicable in mutual fund, why should I keep the fund knowing the price will drop?
  7. Mutual fund cannot be compared with FD, their risks are different!
It is no surprise why many will hate mutual fund as well as some loving it. Lets revise the wealth pyramid again.

Fix Deposit / Bond are generally acceptable as a worry free saving while stock investment is generally understood as risk is involved. Guess what, Mutual Fund sits in between them and actually is the only personal finance vehicle that transition from one to another. So by its nature, there will always be some confusion and conflicts in mutual fund. What FD people likes about mutual fund is usually what derivative investor hates about, what a stock investor likes about mutual fund is usually something a FD guy would not agree.

At one end, mutual fund is like a FD, on another end its like a stock investment but actually it is Neither of them. So you cann't compare mutual fund with FD and yet you could, like wise with stock investment.

There will be some articles addressing some of the concerns raised above, but below are the short answers.
  1. If you look at the world's best investors of all time, in average they out perform the market by 6.46%. This includes Warren Buffet, Benjamin etc. Most of the fund managers may not be as good as the Gurus, but their past historical performance is not that far apart.

    Most people who curse at fund manager's competency are due to their unrealistic expectation. Some ofcourse is due to their own unhappy experience. Either ways, generally fund managers' performance is at par but definitely has room to improve.

  2. Let's face some factual figures. The most a mutual fund business can squeeze out of the investors are the 5-6% no matter how they distribute among their agency force. Insurance can be up to 40% while MLM structure usually allocate more than 55% in similar distribution.

    So if one is worry his agent gets richer just because he invest, mutual fund is probably NOT the first and major concern relatively.

  3. The 5-6% High Fee is VALID but may not be as bad as it was described. For example, a comparable stock investment with 0.7% fee could have an effective rate of 2.31% vs the mutual fund's 5.5%. So buying one mutual fund is as if buying 2 stock counters.

  4. See 1). Get the expectation right. No one becomes rich because they buy mutual fund. But when done right, many retire wealtheir than they initially thought of.

  5. Yes, mutual fund CAN BE an active invesment like in 6). But MalPF preaches not to use it that way, one should use mutual fund the PASSIVE ways.

  6. If you know the timing of a market trend, mutual fund and dollar cost averaging concepts is NOT something for you. Buying a stock can give you exercise your timing concept with lower fee. This is an example of how to.

    Are you sure you are not an agent earning commission when you encourage people to speculate using mutual fund ? Are you sure there is no conflict of interest with your clients portfolio ?

  7. As mentioned above, the top part of mutual fund ie. equity fund cannot be compared with FD but the lower part of mutual fund ie. capital guarantee fund, money market fund etc. CAN.
Do you hate or do you love mutual fund ?


ChampDog said...

I love mutual funds. :)

Mt. said...

ha ha, good ! Then you must keep reading this blog. The purpose to love mutual fund is to one day grow beyond it and hate it :)

just kidding, the right way to put that is ... the goal is for you to become a fund manager yourself.

Kris said...

I like mutual fund but i LOVE lower transaction costs available currently in the market. :P

Yeah, if you an agent who bugs you to speculate..dump him/her.

Mt. said...

fantastic opinion! the closure of current mutual fund series will be exactly that, future of mutual fund -> lower fee ... and how the fund managers can do it.