Stocks are one of the investment instruments that can give us a high yield. Like they said, high return will come with a high risk, which means that it can indeed grow your capital, but it can also take you to rock bottom, losing everything you’ve put in that basket. This is why there are a lot of people who refrain from investing in equity, because they simply don’t know how to play the game. Erick Worre in his book Go Pro said that he bought 170,000 shares worth $44 each, which means that the total investment was almost $7.5million. It was a beautiful life until the value dropped to $37, before plummeted to $10, making him experiencing a huge loss only within 90 days after his purchase. But guess what, the value of the company has then increased to $65 (1.4x than its initial worth)! Unfortunately, the people who sold their stocks to “cut loss” when it reached $37 or $10 are not there to enjoy the yield.
Stocks go up and down, and its fluctuation is impacted by a lot of both domestic and global aspects. If you didn't really understand what’s going on and how one event correlates to the other, it will be pretty hard to make a prediction of what stocks to buy or sell and when. In fact, even the experts can make a wrong call sometimes! Moreover, most of us wouldn’t have time to monitor the movement of the stocks value that can swing in seconds.
The good news is, mutual fund (reksa dana) was launched to assist us to invest in stocks, with some help from the experts that we call Investment Management. The guys in such companies have all the necessary knowledge, experiences, and tools to do the trading for us, on various stocks.
Mutual funds are like the fruit basket above. Let’s say, the value of each company in one particular fund product is as follow:
Apple Co. : $10
Grape Co. : $5
Banana Co. : $4
Assuming that the fund currently contains of 3 shares of Apple Co., 10 of Grape Co., 10 of Grapes Co., and 5 of Banana Co., the composition would be like this:
A month later, the grapes harvest turns out to be unsatisfactory, making Grape Co. value dropped to $3. On the other hand, Apple Co. experiences value raise to $15 because the apples grow healthy and flourishing. Guess what, this condition was predicted, so the investment manager had actually thrown away 5 of the Grape Co. stocks and added 3 Apple Co. into the portfolio, making the arrangement goes this way:
As you can see, it would’ve went disastrous if we put our money solely on the shares of Grape Co., that the value fell by 40%. Investment Management’s job is to make such adjustment on the product’s composition, like the illustration above, by buying the raising stocks and selling the dipping ones so that the funds will grow no matter what happens in some parts of the whole basket; and this is the factor that makes mutual funds considered as having lower risk compared to investing in pure stocks.
If you were less aggressive, instead of purchasing for equity funds, you can also opt for fixed income funds that combine stocks with some “lower risk” instruments, or money market funds that only contain term deposits and short-term debt securities. The component of each funds is as follow:
1. Money Market Funds
100% in money market and securities with maturity of under 1 year
2. Fixed Income Funds
Minimum 80% in bonds
3. Equity Funds
Minimum 80% in equity
4. Mixed Funds
Investment in bonds, equity, and money market, with a maximum of 79% on each instrument
There is a wide range of Investment Management to choose from, listed by Bapepam, 85 to be exact. The number of mutual fund selling agents is also increasing, that we no longer have to do the transaction at the bank, but we can also do it online through the portals that are provided by online mutual fund supermarkets (and also several banks). It is also a great news for us as customers that nowadays we are allowed to make a transaction of mutual fund with the capital of as low as IDR 100k, and proudly call ourselves an investor!
That was a bit of explanation of why you can consider Mutual Funds as one of the investment instruments to be put in your portfolio. Feel free to share your thoughts in the comment below!