Lower Service Charge for Balanced Funds

In the past five years investment performance, a managed balanced fund in Malaysia is giving an industry average return of 10.43% per annum. I got the figure from the latest Personal Money Magazine October 2007 issue. Most balanced funds, or mixed asset funds charge a front load of 6.5%, which is equal to what is loaded on equity funds investment.

Looking at the other side, fixed income funds or bond funds has a very low upfront charges. Some unit trust companies even charge nil upfront service fee on those low risk funds which require less management task relatively. Public Mutual charges 0.25% only on its series of bond funds.

A balanced fund is an investment portfolio which diversifies its holdings over a range of asset classes which typically include shares, fixed interest, property, overseas securities and cash. Most balanced funds in Malaysia are set up to invest 50% in equity and 50% in fixed income securities.

Here is the money tips I am going to share here: instead of buying a balanced fund that is loaded 6.5%, you can create your own “balanced” portfolio by investing 50% in equity funds and 50% in bond funds. You will save half of the charges, compare 6.5% to 3.325% (3.25% + 0.125% = 3.325%)

Example, let’s say you want to invest RM20,000 in a balanced portfolio.

Option 1: buy directly a balanced fund and pay 6.5% of RM20,000 = RM1,300.

Option 2: invest RM10,000 in equity funds and pay RM650 charges, and invest the other RM10,000 in bond funds and pay RM25 charges. The total upfront fees is RM675 only.

You do the maths and you will find that Option 2 will save you some money.

Photo by wysterior
Is your portfolio a balance one?

But before you do this, some points to consider:

• balanced fund is in “auto” switch mode. Because of the default investment strategy stated in the investment trust deed, the fund manager must not hold more than 50% equity. When the equity part of the fund is making profit, it had to be sold a certain portion to return the fund back to “balanced” portfolio.
• if you are building yourself a balanced portfolio, there are other things that might affect your “balanced” decision, that involve certain human emotional weaknesses. When your equity funds are in the red, you should switch a portion of your fixed income unit into the equity portion to make it “balanced”. You will have to do the rebalancing manually. But when it is really in bear market, many investor just got so much overwhelmed with negative emotion. That affects your investment decision.
• If your investment is not in big scale, you will have to consider the switching fees of about RM25 per switch. When your portfolio is just a little bit off balance, it might not viable to switch and rebalance.

Happy investing!