Switching

If you invest in mutual fund (a.k.a. unit trust), are you aware of ’switch’? If you aren’t aware of it, then you have missed a lot of opportunities to generate more money from your mutual fund investment. As the wise saying, “Smart investors win in both good times and bad times.” ‘Switch’ offer that opportunity to win in both good times and bad times.
Mutual fund is widely promoted as a medium- and long term-investment. Thus, many investors believe that they could achieve their investment objectives by holding on to their investment for at least three to five years, irregardless of the market situation. Well, the notion that says mutual fund is a medium- and long term-investment is correct. But there are more to it. It only shows half of the picture. For example, in property investment, which is well-known as a long term investment, we don’t simply buy and hold but we also renovate, maintain and rent our properties, and trade them for better ones. In mutual fund investment we buy, switch and sell. Most investors know ‘buy’ and ‘sell’, but very few know/aware-of ‘switch’.
Although ‘switch’ is mentioned over and over again in the mutual funds’ brochures and prospectuses, and by the mutual fund agents, it doesn’t ring to the majority of the investors. Their financial literacy hasn’t recognised that useful secret word yet. So, what is ‘switch’ in mutual fund investment?
When it is dark, we switch on our lights. When it is bright, we switch off our lights. It is easy to understand, isn’t it? In mutual fund investment, the days aren’t always bright too. There is up and down. When the fund’s price (per unit) is increasing, the investors buy (more) investment. When the fund’s price is decreasing, the investors sell their investment. They buy back the investment when the fund’s price has bottomed-up. But there is a better way than buy-sell-buy: buy-switch-switch-back.
Advanced investors invest in high risk, high return investments when the market is favourable; and move their funds to low risk, low return investments when the market isn’t favourable. The mutual funds which have high equity ratio are high risk, high return investments. These are the places where you grow your fund when the market is bullish (in favourable condition). The mutual funds which have low equity ratio, invest most of their resources in money market and debt market, are low risk, low return investments. These are the places where you protect your investment when the stock market is bearish (in unfavourable condition). As their price per unit is quite stable, you could lock-in your gains from the high risk, high return investments here.
When the day is sunny, you hang your wet laundries outside. When the day is rainy, you bring them inside, under the roof. And you hang them outside again, when the rain stopped. Well, your laundries still can dry when hanged indoor but at much slower rate than if hanged outdoor, under the sun. Anyway, it is still the best option during raining. Similarly, your fund still can grow in the low risk, low return mutual funds but at much slower rate than if invested in the high risk, high return mutual funds. Anyway, it is still the best option during bearish market condition.
You might say, “Hey, why I switch when I actually can sell my mutual fund investments?” Well, if you sell your mutual fund units thinking that you won’t buy any in the same funds in the future or that you need that cash now, there is no reason why you are discouraged to sell. Sell it. But if you think that you will invest in the same mutual funds again and that you don’t need that cash now, I am telling you that it is wiser to switch than to sell. Please consider switch. Why? Cost. The switching cost (switch and switch back) is generally lesser than the buying cost.
Read more from:
http://www.iankree.com/2010/02/19/money-game/turn-your-mutual-funds-switch-on-and-off/