Chapter 4 Understanding Mutual Fund Variations

Getting Return when the Stock Price is rising

1. Mutual Fund that Diversify Investment in Several Equities

Following Market condition

The type of mutual fund which consist of stocks are called ââÅ¡¬ÃƒÆ’…equity mutual fundââÅ¡¬. For this kind of mutual fund, the NAV value fluctuates based on the price of stocks which form the portfolio. This kind of funds aim to get higher return compared to bond-based mutual fund.

The return of equity mutual fund changes according to market condition and the type of equities it hold. For example, when the market is good the NAV of the equity mutual fund is rising.

Furthermore, if we need to check the performance of each companies and predicting the stock prices in the future, in Indonesia there are around 500 companies listed, it will be a pretty difficult task. Because of that if we entrusting to mutual funds, the IM will be collecting and selecting the stocks. We donââÅ¡¬ÃƒÆ’¢Ã…¾¢t need to analyze the detail one by one. About the risk and return, you might think ââÅ¡¬ÃƒÆ’…I want to invest on company with good stockââÅ¡¬, or ââÅ¡¬ÃƒÆ’…I want to get big returnââÅ¡¬, or ââÅ¡¬ÃƒÆ’…even during recession, I want to invest on strong stockââÅ¡¬, from here if we already choose the direction and guideline of risk and return, we can start investing on stock right away through equity mutual funds. For people who have limited amount of capital to buy stock, because minimum purchase of stock is 1 lot (100 stocks) which if the stock price is Rp 10.000 per stock we need to prepare Rp.1000.000 at minimum per stock transaction, if by using equity mutual fund those money can be diversified into several type of stocks.

The Risk of depreciation is small because not part of equity

2. Fixed Income Mutual Fund for High Stability

Understanding safe long term investment

The character of this type is the risk of price depreciation is lower compared to equity mutual fund. In securities such as government or corporate bonds, we give ââÅ¡¬ÃƒÆ’…lendingââÅ¡¬ to the country or corporation. We then will get the interest regularly during the lending period. The full investment fund will be returned fully in the end of lending period.

From those point, bonds are intended for those who want to invest for long period of time, getting stable return (as dividend), and far from the risk of price falling. For those who already investing in equity mutual funds, also having fixed income mutual fund which based on bonds, is one way to diversify the risk.

However, compared to equity, the risk and return is small. In this case, fund that doesnââÅ¡¬ÃƒÆ’¢Ã…¾¢t need to be used in near time is also needed because to increase the total return, long-term investment is needed. In addition, generally interest rate offered by corporate or local government is higher than country bonds. In bonds mutual fund also, the ratio is different depending the product. Hence before investing, it is better to take a detailed look to the prospectus.

Investing with good balance in multiple assets

3. Hybrid Mutual Fund for Easiness for Beginner Investors

Just by one mutual fund you can diversified your investment

In mutual fund division, there is ââÅ¡¬ÃƒÆ’…equity mutual fundââÅ¡¬ and ââÅ¡¬ÃƒÆ’…bond/fixed income mutual fundââÅ¡¬. But in the middle exist ââÅ¡¬ÃƒÆ’…hybrid mutual fundââÅ¡¬ which is convenient for beginner investors.

Hybrid mutual fund does not target only one but several assets which have good investment balance and also merging equities and bonds.

The main rule in assets investment world is that investment need to be diversified into a lot of assets. So if you only investing in a single asset, the risk of damage on the investment is becoming big.

Because of that we divided our investment into a lot of kind of investments which have different price movement such as ââÅ¡¬ÃƒÆ’…bonds and equitiesââÅ¡¬ or ââÅ¡¬ÃƒÆ’…international assets and national assetsââÅ¡¬, etc. and both need to have separated price movements like image bellow so the risk is minimized.

In investment diversification, there are a lot of investment products along with each classification groups that can be chosen. But choosing this is a difficult task for newcomer. With balanced/hybrid mutual fund, just by selection one fund and entrusting the selecting process to professional investment manager, even beginner investors can start doing investment diversification.