Tuesday, September 7, 2010

Common Myths about Mutual Fund

Recently noticed a lost making investment product from my father, guess what -- Mutual Fund. Invested 12 years ago with principal of $4000, today the market value is worth $1512. (OMG, a loss of 62%) Why invest in Mutual Fund and there are still many invest in Mutual Fund, they might not aware of common myths:

1. Fund management said for people who know nothing about investment, mutual fund is best for them. This is not true, as for the case of my father, he bought and kept it for more than 12 years but end up in lost position. One still need to learn what's fund management and how to invest in the fund than simply listen to sales agent.

2. Buy the fund and keep it for long term will profit in the end. Sales agent always tell investor to invest for long term, but the Fund never guarantee with profit not to mentioned about benefit from compound interest. (also read the disclaimer clause, past performance never guarantee the future...)

3. The best time to buy fund is any time. Buy at any time? Fund management claimed that the fund is managed by professional that take care of market timing, investor just need to buy at any time. This is not true, as the fund is subject to market movement, sometime the fund will sell at very low price. Seem one need to buy low and sell high? If want to buy low and sell high, why trade the fund which cost you 5%, whereas if you trade directly in stock market, only 0.5%.

4. Fund management take care of risk as the fund manage by professional to have diversified set of holdings. This is not true as the risk involved is similar to invest directly into stock market. Also, is it through asset allocation can really reduce the risk? If yes, why so many fund still selling below the initiate issue price? Why investor need to pay 4 or 5% of management fee each year for this kind of result? Investor need to pay management fee even the fund show negative performance?

5.    Buy with cost averaging method, then will have positive return in long term? If you do this, will end up dig a big hole for you! If the fund was not performed in good years, don't expect it will profit in future.

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