Let’s say if I want to invest in the financial market but I feel that I lack the time and confidence to do it directly. Does that mean that I could not participate in the market at all? No, I still can. That’s the reason for the birth of mutual funds. What exactly is a mutual fund?
Before we continue, I would like to clarify that unit trusts and mutual funds are the same. In Malaysia, we use these two terms interchangeably. In this article, I would use the term mutual fund.
Back to our question, according to Investopedia,
“A mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s investments and attempt to produce capital gains and/or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
(Investopedia Definition Link)“
In short, they are the answer to the question at the beginning of this article. Essentially, you are entrusting your money to a fund manager to invest for you. There are a lot of funds offered by different fund houses in Malaysia. These funds have different strategies and objectives, invest in various sectors, geographical areas and financial instruments. For example, mixed-asset funds, equity funds, balanced funds, fixed income funds, money market funds and alternative investments funds.
Selecting mutual funds
So how do you choose which fund to invest in? First, you have to identify the financial instrument and geographical area fit your criteria (for instance, stocks in Malaysia). Second, look for the funds that fulfil your selection criteria. Third, compare these funds and identify a few best performing funds. Finally, compare the fees of these selected funds and choose one that charges the least fee.
When selecting a mutual fund, take note that past performance does not guarantee future performance. Honestly, the top performing fund this year might not even be in the top ten list next year. The fund selection is not science, but more like an art. Choose the one that is consistently giving good returns.
The investment period in mutual funds should be medium to long-term. The fluctuations in their price are normally not as wild as in the stock market. Thus, it will take a while before you see an appreciation in your investment.
More about mutual funds
Like shares, some funds will also declare dividends periodically. For certain funds, we used to be able to choose to accept cash or reinvest back into the funds itself. But nowadays, I think this practice is not that common or maybe even abolished and most funds, if they declare dividend, will straightaway reinvest the money back into the fund for you. The good thing about this reinvestment plan is that we do not have to pay sales charge for the reinvested portion. It also means that you will only be able to cash out when you sell the fund.
Other than for investors who have no confidence to invest directly in the financial market, mutual funds can also be a tool for investors who want to diversify into other countries. This type of investors can buy the funds that invest in countries that they are interested in. Due to the high transaction cost associated with investing in overseas directly, I find this approach to be more cost-effective.
If you are interested in mutual funds, I would recommend an online platform known as Fundsupermart (Link) because the sales charge is lower (only up to 1.75% as compared to the other fund houses). However, this platform does not include all funds in Malaysia such as Public Mutual funds. You can still choose the famous fund houses if you prefer to do so.