Let’s talk about mutual funds and how to make them work for you. As a former UTC executive (yeah NIB and UTC…I might be the blight) I know a thing or two that may prove useful in helping you turn the price of a Nuggle into a red Solo and a “fry-bake” and cheese. First off, it’s definitely true what they say about the size of a man’s foot and also that all mutual funds are not the same.

I think by now we all know what a mutual fund is right? Well if you don’t it’s where a company, known as the “Sponsor”, invests in a pool of assets and then sells a stake, known as shares or units, to third party investors.

One of the things that people seemed overly concerned about recently is the ability of a government or anyone else to come and just take the assets belonging to a fund and use it for another purpose. Now that elections are over there’s no reason for you to continue to sound like an ignoramus at the bar or on the inter-webs, so let’s clear this up.

Each mutual fund has its own assets and liabilities. The liabilities are mainly your deposits and other expenses. The assets are the investments made by the pool into securities on your behalf. Now here’s the kicker that probably nobody explained to you during the madness of the last few weeks. By law, all of the assets (including cash) of each fund are segregated from the Sponsor’s assets, a term known as “ring-fencing”. Also the assets of each fund can only legally be used for that fund. The Sponsor is not allowed to take the assets from one fund to supplement another fund, a prohibited activity known as “commingling”.

However, the Sponsor has its own assets and liabilities that has nothing to do with the investors. So that if anyone wanted to say….mobilize “idle funds” then it would have probably been the unused cash of the Sponsor company. It is more likely that the Sponsor would have been approached to invest in a particular vehicle on behalf of investors. Depending on the rate of return it could have made sense for the fund. So at the end of the day your $80.46 cents in an income fund wasn’t “jumping-up”, as some would have you believe.

Ok, so now that’s clear let’s move on to some of the things you may not know about mutual funds and others you probably know but need a little reminding. I’m not going to discuss the types of funds, net asset value, which mutual fund has the best sports and family day or the best company logo cardigan (UTC for sure).

Number 1, pay attention to fees. The Sponsor company typically charges either an initial charge or a charge when you redeem your shares/units. They also charge you for managing your money, known as….drum roll…a “management charge”. The key is to always compare the fees and expenses vs the returns you earn. Believe it or not there are funds that actually charge you more than they pay you in interest, especially in a low interest rate environment like we’re in now. Ask your investment advisor for a breakdown and watch them sweat like a “zesser” who call up Gary name on social media and then sitting bareback and handcuffed on a old sweat stained mattress.

Another mistake I wanted to address is the folly of using your mutual fund like a bank account. There are advisors that might tell you to put your entire salary into a fund and then use your card to pay for every day items. That is a bigger mistake than putting pepper on a KFC spicy breast, and possibly just as painful.

When you do this you not only lose the benefit of compounding (interest earned on interest) but you force the fund to purchase and keep more short-term assets to be able to meet your withdrawals. Short-term assets have lower interest rates and thus it reduces the rate of returns to you the mutual fund investor. My personal view is that having a mutual fund connected to a bank card does not foster saving and investing. It fosters buying bake and shark on Maracas or a nice porcelain tile for the guest bath at Roops (if you don’t know where that is, ask somebody).

Finally, the last thing I wanted to mention is to be mindful of currency risk. I’m sure you already do that but if you don’t the key is to make sure you can get your capital back in the currency it was deposited. The last thing you want is to deposit US$ in a fund and when it’s time to get it back all they giving you is sad stories and TT$ equivalent.

Feel free to message me if you do want more information on the boring technical stuff like Fixed versus Floating NAVs, ETFs, forward pricing or which mutual fund has the best end of year party.

TANA

This Post Has One Comment

  1. Kevin Phillips

    Great blog post, as always. Any recommendations on the best mutual funds to invest in? I’m currently considering HMB’s Saaman Fund

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