Jul 25

If you have surplus cash money, where should you keep it? Here are some of the alternatives:

  • Deposit your money in saving account
  • Put it in fixed deposit account
  • Hide it under your pillow

The above methods are easy to do. But your return can barely cover inflation rate. That means your buying power reduces every year even after adding in the tiny interest earning.

You can also invest in stock or property. But it takes time and money to really acquire the knowledge of investing in these two popular investment vehicles. Of course, you can get a higher return. But if you don’t know what you’re doing, you may risk getting hurt financially.

So where can you keep your money for significant return without too much risk?

Welcome to the investment world of mutual fund or unit trust. This investment shouldn’t sound strange to you as it has existed for quite a long time. I’ve heard of mutual fund for many years before really going into it.

It started when my family and relative wanted to invest some money into Public Mutual Fund (Malaysia). So I thought why not apply for a unit trust consultant and become their agent. I can also invest for myself at a discounted service charge.

From the compulsory unit trust seminar for agent, the information I previously knew about mutual fund finally make sense to me.

Basically, mutual fund is an investment pool managed by a qualified fund manager. The manager will invest in stock, bond or other money market instrument according to their fund objective and characteristic. The advantages of mutual fund are:

  • diversification – reduce the risk of  dropping investment value
  • professional management - fund maintained by qualified fund manager
  • low entry amount – you can start to invest from as low as $1000, with monthly contribution of $100 or above
  • ready access to fund -  manager buys back your fund anytime you want to sell
  • lower investment costs

Different types of mutual fund

Mutual fund is further divided into various types with different investment strategy. The basics are:

  • equity fund – invest primarily in stock market : higher return but more volatile
  • bond fund – invest primarily in bond market : lower return but less volatile
  • balanced fund – mixture of equity and bond fund – return and volatility in between equity and bond fund
  • money market fund – invest primarily in low risk money market instrument : lowest return and risk

You need to choose the fund type that suits your specific investment objective. If you’re a young person with plenty of time to see your investment grows, invest more in equity fund. After 5 years, you should see significant earning even with the high volatility of equity fund.

If you’ve retired, cannot withstand high volatility or need your money in near future, you should invest more in bond fund instead. This fund type is more stable but with lower earning of course.

If you’re in the middle of the two situations above, choose balanced fund instead. Money market fund is usually not recommended due to its very low return. However, you may use it to park your money temporarily while waiting for better investment opportunity.

Mutual fund investment strategy

Besides choosing the fund type according to your investment needs, you can invest in different fund type according to market condition for higher return and lower risk.

Basically, when the stock market goes downward, the price for equity fund goes down too. This is a good time to invest in equity fund for good earning when stock market recovers again. Most people are afraid to invest when the price goes down. By buying fund from reputable mutual fund company with good track record, you should be doing fine.

In reverse, when the stock market gets too hot and shoot up too high, you should be careful. If you realize most stock is overpriced, you should invest in bond fund instead. If your previous equity fund’s price goes up a lot, you can lock in your earning by switching your equity fund to bond fund.

Basic mutual fund investment mentality

Investing in fund from reputable mutual fund company can be rewarding for your long term investment needs. You get the opportunity to get higher earning while minimizing your risk. It is an almost no brainer investment process. Even opting for fixed monthly contribution in a particular fund can give satisfactory return in the long term.

Here are some basic investment mentality you should know:

  • The price of your mutual fund goes up and down according to market condition. This is normal. Don’t be too sad when the price suddenly drop. And don’t be too happy when the price shoots up high. Think long term. Basically, 3 to 5 years should even out any market volatility and let you see some profit.
  • Don’t expect to earn a lot of money in a short time. Treat investing in mutual fund as a saving process. You should see significant earning over the long term.
  • Don’t be afraid to buy when the price goes downward. This is often the best time to buy for good profit. If you invest in a company stock and it goes bankrupt, you may lose all your invested money. But with mutual fund, you won’t see your invested money shrink to zero due to its diversification strategy. A fund may invest in hundreds of company stock.
  • Don’t buy and sell your mutual fund within a short period. This won’t go any good for long term due to the initial service charge you need to pay. Once again, mutual fund is not for opportunistic investment to get quick gain.

With good discipline, you can invest successfully in mutual fund to meet your investment objective. Remember not to keep too much money in saving or fixed deposit account. High inflation rate will kill your tiny earning in those deposits. A good start to open up your world of investment will be mutual fund.

Happy investing :)

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