19 September 2011

A Comparison of Mutual Fund and Stock Market Investment: Personal View

Mutual fund is a fund, which accumulates money from many investors, managed by a fund manager or a team for investment. Generally, most of the money will be invested in stock market. Personally, I more prefer to stock market investment. Maybe the mutual fund agent who tried to convince me to invest mutual fund is right: We do not need to spend time to analyze a particular company while we still can invest our money. However, there are five important points I care about:

1. Who is the fund manager?
Of course, if Warren Buffett is the fund manager, I will invest my money in the fund. But the problem, most of the investors is speculators. Unless I know who the fund manager is, I will never consider this kind of investment.

2. Transparency
Next, what I am interested in is where my money goes. Mutual fund investment, apparently, only shows which sectors are invested. Moreover, as a value investor, I do not dare to take an investment if I cannot tell or assess its intrinsic value. In addition, it is apparently less information available for mutual fund compared to stock market, where I can easily download the company annual report via Internet. Therefore, personally, mutual fund investment is more complicated and has more uncertainty than stock market investment.

3. Return
I must admit that the fund’s performance the agent showed impress me. That was, three hundred percent capital return in 5 years. But, please bear in mind that the calculation is based on the lowest price and the highest price in the 5 years. In other words, you must be very lucky to have the fund at its lowest price and sell it at its highest price. After taking a long breath, I asked myself, who will know the performance of a particular fund in next 5 years? And who will know the performance of a particular company in next 5 years? Apparently, the latter is easier.

4. Cost
Yes, we do need to consider the cost of our investment. For stock market investment, all we need to pay is less than 0.5% of our capital per transaction. Mutual fund investment, on the other hand, consists of transaction (normally > 3%), annual management fee, bonus for fund managers, the commission for agents, etc.

5. Intrinsic Value
The intrinsic value of a company can be assessed based on the company’s profitability and future prospect. If the market price is higher than its intrinsic value, then we can sell out our shares, and vice versa.

After a comparison between mutual fund and stock market investment, I have strong will to continue my stock market investment journey. But if you really lazy to take care your own money yourself, maybe, mutual fund is a good place to grow your wealth. For this solution, make sure you choose a good fund manager. No pain, no gain. That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia


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