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Cost Matters Hypothesis

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Nov. 23rd, 2005 | 09:50 am
mood: determineddetermined

I'm busily reading this article:


It's about the difference between theoretical market returns and actual returns to investors. Which is something I am looking at closely right now :) We have invested in a fund which has a "front-end load", or sales charge of 5% for the initial investment, and 3% for each regular monthly investment after that (naturally we made the initial investment as small as possible). It's actually a feeder fund going to Colonial First State's Global Resources Fund, managed in Australia. Management fees are something like 2% p.a., meaning it has to perform at at least 7.4% to beat the Netbank Saver's 5.4%, and that's before taking the sales fee into account.

The 2% sales fee on the Infinity index funds here in Singapore can be reduced further to 1% by using an online distributer (http://www.fundsupermart.com or http://www.finatiq.com), so I am seriously considering those.

But there is another option, Exchange Tradeable Funds (ETF). These are unit trusts which can be traded on a stock exchange, incurring stock brokerage fees instead of sales charges. I believe that these are considerably less, although I have not seen actual figures yet.

Advantages of ETF:
- Low fees.
- Can trade at any time during the day (no advantage for me, as I intend to hold for long term)
- Follows index, just like Index funds

Disadvantages of ETF:
- Liquidity: To sell an ETF, you must have a buyer. Likewise, to buy you must have a seller. Unit trusts will ALWAYS take your money and ALWAYS allow you to redeem. For a small ETF, you may lose some money as you have to buy/sell at a premium/discount due to lack of buyers and sellers.

So that's where I am at now.. still doing research.

Regarding currency movements: One way to "hedge" (bet both ways to reduce risk) against currency movements could be to invest in both Australia and Singapore. But splitting the money may reduce economies of scale.

Next journal entry will be on dollar cost averaging, as I try to sort out the implications of it :)

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