Chapter 3 Don

Learn what is Mutual Fund

1. Understanding 5 Special Characteristics of Mutual Fund

 First Step in Choosing Mutual Fund

By itself, mutual funds have a lot of variations. Despite looking similar to each other, there is actually some differences. For example, mutual funds that invest on Asia region having various different portfolios. Despite at glance looking active, but the percentage of growth differ, could as much as two or three times in difference. Because of that, at first we need to understand the characteristic of that mutual fund. We need to understand the target area of investment, assets, and investment management. At least we need to understand those three main points so we have a simple image of the mutual fund. From those points, we can take a deeper look on the fund through the Prospectus.

If Investing as assets, make sure whether the hedging is used or not.

Retun in 1 Year, 3 Years, or 5 Years

1. Checking Total Return

 Examine the return of prior period

Total return is the total of investment result in a certain period from the fluctuation of the price. Can be seen as profit of investment from previous period. If total return for 3 years period before is 5%, then the 5% is divided by average return per year.

For Total Return calculation method are divided into 2:

·return that is Re-Invested (for compound interest)

·return that is received (for simple interest)

We need to understand the concept of Compound interest and Simple interest because there is a difference between the two (generally in Indonesia, the return is automatically accumulated into the investment).

Total Return is calculated based on subtraction of base price with Investment result, but does not take into account redemption fee and other administration fees, because of that the fee must also be keep in mind. Total Return is an important point in choosing mutual fund. It can be said it is a promising investment if previous Total Return is higher compared to similar products. However, need to be remembered that Total Return show the previous result and does not guarantee the future result.

When we received the investment result, sometimes we ask ââÅ¡¬ÃƒÆ’…is this actually a profit or a loss?ââÅ¡¬. For this matter there are several things to be made clear of in correlation to Total Return.

Total Return Calculation

You can check the Total Return through Selling Agent, Investment Manager, or related website such as Morningstar or Pasardana.id.

Total Return that was received. Period 1, 3, 5 yrs. Calculated from previous month of the end of each period. 5 yrs mean total return from all 5 years.

If the mutual fund has not reach the specified period, it will be signed with (-)

If the Total Return is minus, the it means loss.

Taking a look on Mutual Fund and Risk Level

3.Understanding the Return Level with Sharpe Ratio

Keen at spotting Prime Investment!

What does Prime Investment means? Investment is not as simple as ââÅ¡¬ÃƒÆ’…the higher the return means primeââÅ¡¬. Because outstanding return come from risk that is also great.

In order to spot prime investment, we must also take a look on ââÅ¡¬ÃƒÆ’…low risk but high returnââÅ¡¬, or ââÅ¡¬ÃƒÆ’…return percentage is always increasingââÅ¡¬ as basic points. If the increase of Total Return is on same level, investing on funds with lower risk is a better option.

The presentation of investment productivity as shown by below graphic is called Numeric Sharpe Ratio Efficiency Index. The higher the Sharpe Ratio, the the better the return compared to risk taken. In other words, the higher the value of Standard Deviation, the higher the risk.

We also can understand the detail of Sharpe Ratio from Selling Agent, Investment Manager, or websites that provide the relevant information.

Just like in Total Return, Sharpe Ratio is not merely seeing the number, but we also need to compare it to similar investment.

The Bigger the Assets, the Bigger the Return

4. Mengamati Perubahan Nilai Aktiva Bersih

Decreasing Assets, an alarming sign!?

Next, point that need to be keep in mind is Net Asset Value. NAV is the investment amount after all other fees. As consideration, the bigger the NAV grow, the bigger is the return.

If Net Asset Value is tend do decrease in value, we need to take a look on these conditions:

• The decrease of price of the portfolio base, then NAV will also decreased.
• The portfolio base price does not decrease, but the total net assets decreasing

Condition ?, the underperforming of the management can be the cause of it. The problem is not the fluctuation of the price in short term, or better compared to benchmark, but if the decrease is clear if we compared it with similar funds especially if the decrease is significant. If this happen we need to be alert.

Condition ?, the numbers of fund redemption can be the case. If the business pattern is too small, there will be a difficulties in managing the investment.

When the invested money is paid, then total net assets is decreasing. This is normal and donââÅ¡¬ÃƒÆ’¢Ã…¾¢t need to be worried of.

LetââÅ¡¬ÃƒÆ’¢Ã…¾¢s take a look on the movement of total net assets. In the beginning, the fund enter continuously (total net assets increasing), the suddenly big outflow of capital thus lowering the total net assets. We need to be wary in this kind of event.