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