| A mutual fund (called 'unit trust' in Asia) | | | | another 1.5% every year. Your fund must |
| is an investment vehicle that pools money | | | | outperform the S&P 500 by 6.5%-8% just to |
| from many individual investors. A | | | | make it worth your while! Again, less than |
| professional fund manager invests and manages | | | | 10% of funds worldwide can achieve this every |
| these funds into stocks, bonds and other | | | | year and less than 3% can achieve this over |
| securities. | | | | five years. |
| | | | |
| People usually invest in mutual funds because | | | | 2) Buying the Hottest Performing Funds |
| it is offers the advantage of broad | | | | |
| diversification (it spreads your money over | | | | Most people choose funds based on high |
| tens or hundreds of stocks to reduce risk) | | | | short-term returns. These are the funds that |
| and professional management. However, do | | | | are normally pushed and advertised by |
| remember that as broad diversification | | | | financial retailers. They feature impressive |
| reduces risks, it also reduces return. | | | | and enticing returns like 'This fund was up |
| | | | +65% in the last six months'. |
| First, here is the bad news. If you speak to | | | | |
| most people who have invested in unit trusts | | | | The fact is that the best short-term |
| in Asia (especially Singapore) or in mutual | | | | performing funds tend to also be big losers |
| funds, most would report losing money or just | | | | in the subsequent years and long term. Why? |
| earning measly returns of 2%-4%. In fact, in | | | | Because these funds tend to be invested in |
| the year 2004, it was reported in the Straits | | | | hot stocks or hot sectors where the stocks |
| Times that 559,000 Singaporeans lost $680 | | | | have been rising rapidly and fund managers |
| million by investing their CPF in these | | | | buy, riding on the momentum. That is why they |
| funds. By going to the largest unit trust | | | | post very spectacular returns. However, |
| distributor Asia, you can easily calculate | | | | strong buying activity tend to push these |
| that only 6% of unit trusts beat the S&P 500 | | | | stocks to be overvalued and sure enough, the |
| over a ten-year period. What are the chances | | | | stocks will come crashing down in the next |
| of you placing your bet on this 6%? Chances | | | | few years. Mutual funds that consistently |
| are you would have had lower returns that the | | | | beat the S&P 500 tend to be invested in |
| index, while still having to pay those hefty | | | | non-hot sectors and do not post spectacular |
| sales charges and annual management fees. | | | | short-term returns. |
| | | | |
| How about the US mutual fund market? On | | | | 3) Limited Selection of Unit Trusts Locally |
| average, less than 10% of mutual funds beat | | | | |
| the S&P 500 index each year! What's worse is | | | | If you are in Asia, then you are normally |
| that it is a different 10% each year. Less | | | | exposed to only a limited number of unit |
| than 3% of mutual funds are able to beat the | | | | trusts. A check with (the largest Asian unit |
| S&P 500 Index over a five to ten year period. | | | | trust distributor) shows that there are just |
| So again, what are the chances of you beating | | | | about 300 funds available here compared to |
| the market through betting on the right fund? | | | | over 8,000 funds in the US market. |
| Only 3%! You have better odds at the Black | | | | |
| Jack table. The worse thing is that the fund | | | | When I made a search on the Top Performing |
| manager gets paid an annual management fee | | | | Fund sold locally (year 2005), I was |
| whether or not the fund makes money. | | | | presented with 'Fidelity America USD' with a |
| | | | 10-year annualized return of 11.27%. (Recall |
| Why is it so difficult for most people to | | | | that the S&P 500 returned 12.08% a year). So, |
| make money in mutual funds? There are four | | | | even the top-performing fund couldn't beat |
| main reasons. | | | | the S&P 500 after deducting expenses & fees!! |
| | | | |
| 1) High Sales Charges & Management Fees | | | | 4) Lack of Research Knowledge, Data & Tools |
| | | | |
| Most people buy mutual funds through banks | | | | The single most important reason why |
| and financial institutions at retail prices | | | | investors lose money in mutual fundsis |
| where there is a sales charge (front load) | | | | because they don't have the knowledge or |
| and high annual management fees (expense | | | | necessary information to search for the top |
| ratios). | | | | 3% of consistent performing funds at the |
| | | | lowest costs. Investors tend to buy on the |
| In Asia, most banks & financial institutions | | | | advice of their bank managers, facts from the |
| sell unit trusts with a sales charge of 5%-6% | | | | fund fact sheet or prospectus which does not |
| and with annual fees of 1.5%-2%. It means | | | | provide enough information to select the |
| that before you even begin, you are down | | | | right fund. |
| 6.5%-8% on your investment and will be down | | | | |