TC BUSINESS
Stocks,
bonds and mutual funds
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Illustration by
Yukiko Leitch |
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There are really
three kinds of investments that make money over the medium to long term; stocks (or
equities), bonds, and property. I will not discuss property, as it tends to be time
consuming (more so if you are temporarily residing in another country) and the full value
is difficult to realize if you need to sell quickly. Also it requires a large amount of
upfront capital to get started, thereby putting all your eggs in one basket.
Stocks or shares represent ownership of a company. As a shareholder, an investor owns a
portion of the company' assets and profits. With ownership, however, comes risk.
Stockholders assume the primary risk; if a business does poorly the share price can fall,
sometimes to zero if a company fails. Stockholders also stand to realize the greatest
returns if it succeeds. Think of Bill Gates, who is the richest man in America because he
owns (through shareholdings) a large part of a very successful company.
Bonds are issued by companies or governments and are debt obligations. Instead of
borrowing money from the bank, they "borrow" from investors. A bond will pay a
fixed rate of interest for a fixed time period, at the end of which, the initial
investment (principal) is paid back. The interest rate will depend largely on the duration
of the bond and the credit rating of the issuer. A Russian taxi company will pay investors
a much higher return than the US Government because there is a risk that the taxi company
will not pay back the initial principal.
As individuals we all face two problems concerning both types of investments: the
expertise and time needed to select the right stocks and bonds and enough funds to achieve
an acceptable spread of risk. The answer is a mutual fund or unit trust, which allows you
to pool your money with other investors and pass it on to a professional investment team
at a large Fund Management Company. The Fund Managers literally spend all day long
monitoring the markets to find the best possible investments in line with the fund's
investment strategy and risk profile. They also decide when to buy and sell the various
securities to take advantage of opportunities and minimize losses.
The Fund Manager's job is also to ensure that the fund is exposed to a broad enough base
of components to ensure growth and minimize risk. Each fund sometimes holds hundreds of
different stocks or bonds, spread across many different countries, industries and
companies. Investors in funds are able to own a properly diversified portfolio with a
relatively small amount of capital. Setting up a similar portfolio individually would take
a lot of time and require in excess of USD1 million.
Funds are easy to set up with a regular savings plan and involve very little paperwork.
Managed (or Asset Allocation) Funds eliminate the need to choose which funds to buy and
sell, or how much of your portfolio to allocate to stock funds and how much to bond funds
as each have different merits. With a Managed Fund, the Fund Managers alter the geographic
mix and allocation of stocks, bonds and bank deposits depending on market conditions. By
choosing a good Managed Fund, you will be able to sleep at night secure in the knowledge
that a vigilant team is always looking after your portfolio.
A Managed Fund combined with regular automatic savings will mean that your future
financial security will not be left to chance.
Kenji Steven is a consultant with Stirling Macguire Asset Management
(Japan) Ltd. |
