Photo by Kenn Kiser

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.

Example: Several service charges of Public Mutual (Malaysia)

• Service charge (buying fund units): 5.5%
• Service charge (selling fund units): 0%
• Service charge (switching from equity/balanced fund to bond fund): $25
• Service charge (switching back from bond fund-loaded units to equity/balanced fund): $25

Disclaimer: Please refer to prospectus for the latest fees and charges.
Notes: Loaded units are units which have incurred a service charge of 3% or more at the point of purchase. And only showing several service charges which we need in this discussion.

A math-wise example of switching of units

Let us do some math works to increase your understanding. Given the following scenario:

Let’s say on 15-Apr you have 20,000 units in Equity Fund A and 1,000 units in Bond Fund B.

Between 15-Apr and 15-May: You see that the Equity Fund A price is dropping. Wisely, you are thinking of switching units from Equity Fund A to Bond Fund B. And you know that you have to leave minimum 1,000 units in Equity Fund A to obey the switching rules set by Public Mutual. You take that action on 15-May.

After switched | Calculate new total number of units in Bond Fund B

Number of units that you want to switch from Equity Fund A to Bond Fund B
      = 19,000 units of Equity Fund A

Switching service charge $25′s equivalent units of Equity Fund A
      = $25 ÷ $0.75/unit
      = 33.33 units of Equity Fund A

Number of units that you able to effectively switch from Equity Fund A to Bond Fund B after considering switching service charge $25
      = 19,000 units − 33.33 units
      = 18,966.67 units of Equity Fund A

The $ value of 18,966.67 units of Equity Fund A
      = 18,966.67 units × $0.75/unit
      = $14,225 of Equity Fund A

Number of units to be added Bond Fund B
      = $14,225 ÷ $0.25/unit
      = 56,900 units of Bond Fund B

New number of units in Bond Fund B
      = 1,000 units + 56,900 units
      = 57,900 units of Bond Fund B

The price of Equity Fund A dropped further to $0.50 (15-June). Luckily you had switched your units from Equity Fund A to Bond Fund B, leaving only 1,000 units there – as said, to obey the switching rules set by Public Mutual.

Equity Fund A seems bottomed-up at $0.50. The market condition has improved ever since it touched that level. Therefore you think it is time to switch back your switched units to Equity Fund A from Bond Fund B. You take that action on 15-July.

After switched-back | Calculate new total number of units in Equity Fund A

Number of units that you want to switch from Bond Fund B to Equity Fund A
      = 56,900 units of Bond Fund B

Switching service charge $25′s equivalent units of Bond Fund B (units)
      = $25 ÷ $0.26/unit
      = 96.15 units of Bond Fund B

Number of units that you able to effectively switch from Bond Fund B to Equity Fund A after considering switching service charge $25
      = 56,900 units − 96.15 units
      = 56,803.85 units of Bond Fund B

The $ value of 56,803.85 units of Bond Fund B
      = 56,803.85 units × $0.26/unit
      = $14,769 of Bond Fund B

Number of units to be added to Equity Fund A
      = $14,769 ÷ $0.65/unit
      = 22,721.54 units of Equity Fund A

New number of units in Equity Fund A
      = 1,000 units + 22,721.54 units
      = 23,721.54 units of Equity Fund A

Then on 15-Aug, the Equity Fund A’s price increased further to $1.05.

Comparison | Status as on 15-Aug

If you did nothing, despite the market up and down; the $ value of your Equity Fund A is
      = 20,000 units × $1.05/unit
      = $21,000

If you sold 19,000 units on 15-May (received $14,250) and reinvested back that $14,250 on 15-July (before minus 5.5% purchase service charge); the $ value of your Equity Fund A is
      = 21,717.31 units* × $1.05/unit
      = $22,803.18
*Sorry, I omitted the detail calculation to simplify the discussion.

If you switched as calculated in very detail above; the $ value of your Equity Fund A is
      = 23,721.54 units × $1.05/unit
      = $24,907.62

As you can see, you could gain more if you switch-switch back instead of sell-buy back. And it is not wise to do nothing when the market fluctuate.

Disclaimer: The figures and the switching processes and rules here are simplified so that you can get the basic idea. My objective is to promote the idea of switching of units in mutual fund. Please refer to the mutual fund’s prospectus or refer to your mutual fund agents before you make any investment decision.