Choosing Mutual Funds pt. 1

Stop being easily influenced by financial institution!
When buying Mutual Funds, learn these 3 points:
Course 3; Morning Star Flow Practice Money Plan


A lot of people have tendency to ââÅ¡¬ÃƒÆ’…buy Mutual Funds which are introduced/recommended by Securities Company because they donââÅ¡¬ÃƒÆ’¢Ã…¾¢t know which one to buyââÅ¡¬.

However this is quite risky. The products that Securities Company sells are not always the best for us. If we are not being vigilant, we can be ââÅ¡¬ÃƒÆ’…trappedââÅ¡¬ by it. To avoid this to happen, in this opportunity we will learn to assess the mutual funds to know whether it is good or bad.

Tips in Choosing Mutual Fund, Pay Attention to These 3 Points!

Today in Japan there are at least 4000 mutual funds, and in Indonesia there are around 1100 mutual funds. With that many products, a lot of people are confused on how to know which one is good.

Basically, increasing Mutual Fund assets consistently is not an easy task to do because itââÅ¡¬ÃƒÆ’¢Ã…¾¢s depend on the marketersââÅ¡¬ÃƒÆ’¢Ã…¾¢ speaking ability and the articles or explanations of the benefits of the mutual fund.

In the truth is, there is a simple way that we need to master. As long we know the key, choosing mutual fund is not a hard task. In this review, we what we need to remember is ââÅ¡¬ÃƒÆ’…always pay attention to 3 points in choosing mutual fundââÅ¡¬. Those 3 points are:

  1. Cost
    2. Risk dan Return
    3. Transition and Amount of Investment Capital

To spot which one is good among several product selections, it is crucial to compare the products based on these 3 points. The first one is to compare it based on Cost, then Risk and Return, the last one is Transition and Amount of Investment Capital. By doing comparison from various angles we will one which one is better.


Based on these 3 points, here are the detailed explanations on how important it is to choose mutual funds based on what we need.


COST is the inevitable comparison point

When predicting the quality of investment in the future, a lot of attention paid to the history of the Fund Manager, Risk level, investment performance in the past, and so on. Of course all of those are very important, but still those are the result of past period. No matter how detailed we predict, performance in the past cannot guarantee the performance in the future.

Different from predicting performance and risk, when buying mutual fund we should know how many Cost paid every year. The size of the Cost will have quite big impact to the investment return we get. We cannot just ignore this aspect. So what actually Cost is?

Cost in mutual funds, is divided into two kinds, the first is cost when buying mutual fund (Subscription fee), and second is Cost that is paid annually after we invest on the funds (Management fee, annual fee). The longer the investment period, the Management fee will have quite an impact to the performance. Hence when comparing mutual fund products, it is better to pay attention to Management fee that is paid annually.


Finding more promising Investment product with Risk and Return!

Consideration in choosing mutual fund is ââÅ¡¬ÃƒÆ’…choose lower risk if the return is equal, or choose higher return if the risk is equalââÅ¡¬. For instance there are 2 mutual funds with return 8% annually, the first one has 10% risk level, and the second has 8% risk, then we know which one we should choose.

Unfortunately, in the real world it is not that simple. Because the numbers of each mutual fundsââÅ¡¬ÃƒÆ’¢Ã…¾¢ risk and return we are going to compare are different.

Because of that, to make comparing mutual funds easier, let us try to make division of return with risk. From this result we will get what is called ââÅ¡¬ÃƒÆ’…Sharpe RatioââÅ¡¬, which shows how efficient the mutual fund is. The higher the ratio, then the higher the investment efficiency (prospect) is.


If we calculate the Sharpe Ratio, letââÅ¡¬ÃƒÆ’¢Ã…¾¢s say Iroha vs Nihohe. IrohaââÅ¡¬ÃƒÆ’¢Ã…¾¢s Sharpe Ratio is 0.80, while NihoheââÅ¡¬ÃƒÆ’¢Ã…¾¢s is 0.75. If we compare these two numbers, Iroha has better investment efficiency (take a look at picture bellow). For example, Iroha has 8% Return and 10% Risk, and Nihohe has 6% Return and 8% Risk. Which one has better investment efficiency?

sharpe ratio

Learning the Stability of Investment with ââÅ¡¬ÃƒÆ’…Transition and Amount of Investment CapitalââÅ¡¬

For Fund Manager that investing on mutual fund, ââÅ¡¬ÃƒÆ’…how big the scale of capital that can be invested?ââÅ¡¬ is a pretty important point. If the scale is too small, then Fund Manager will not be able to buy stocks or other securities, this will make the investment performance to struggle. Investment scale with good stability need at least to be over 100 million yen or 11.5 billion rupiah (rate 1yen=115 rupiah). For mutual fund with various products in the portfolio (for example Domestic Stocks Mutual Funds, in Japan), it need at least 1 billion yen or almost 115 billion rupiah of assets.


Next, also keep in mind the pace of capital pooled from the investors (and also the withdrawal of the capital). If the funds can be pooled without much problems, Fund Manager can manage the capital stably, and vice-versa if there are many investors that withdrawing their funds, the Fund Manager need to prepare the fund to buyback units from the investors. Thus making the Fund Manager harder to investing as planned.


As addition, with the amount of capital gathered in one time, does not mean the Fund Manager can invest according to plan. The main reason is Cost. If the scale of capital increasing, then the amount of fund for portion of 1 stock is also increasing, this occasionally make the Fund Manager to unable to buy stocks. When investing money in large sum, if the price of stock increased then the price of each stock we buy also increase, this will be added to buying Cost of all stocks


Based on this reason, when choosing mutual fund, in point 3, we need to understand more deeply about how big the investment fund scale is, and the significance of fluctuation of capital inflow and outflow.


So, after we reviewed 3 points above, next we will make a simple example on the comparison method in investment.


 Next: Choosing Mutual Funds pt. 2