What is Dollar Cost Averaging?
Dollar cost averaging is a concept of investing a fixed amount at a fixed interval, regardless of market condition. The investment can be into either unit trusts or shares, but it is more appropriate for unit trusts.Why? This is because as explained earlier, when investing in unit trusts, the investor can determine the amount that he or she wants to invest, and the units received is based on the amount invested. For investments in shares, it is difficult to invest the same amount into the same company, as the investment amount needed is determined by the share price of the company, and the number of shares is in multiples of 100. For example, you may have decided to invest in Share A when the price is RM1.00. This means your investment in Share A will be RM100 (RM1.00 X 100 shares). In the second month, assume that the price of Share A moved to RM1.10. As the minimum is 100 shares, you will need to fork out RM110 to buy one lot of Share A. Thus, you would not be able to maintain the consistent target of RM100 a month.Assume that you have decided to invest RM100 in Dynamic Equity Fund on the 15th of every month, starting with January 2016. Table 1 shows the scenario.
|Table 1: Example of Dollar Cost Averaging|
|Amount invested RM (a)||NAV of Dynamic Equity Fund (b)||Units received
(a ÷ b)
The observation from Table 1 is that when the price goes down, investors will receive more units, and vice versa.
In this example, on 15 Dec, the value of the investor’s investment would be RM1,211.72 (1,132.45 units x RM1.0700). Although RM1.0700 level is lower than the price at the beginning of the year, the investor still records a positive return on his or her unit trust portfolio.
This is because by investing throughout the up cycles and down cycles, investors get to capture the lower price when the cycle is down. When the price moves back up, investors will have had the benefit of getting some of the units at lower prices. And this is the advantage of dollar-cost averaging.
However, caution is needed to implement dollar-cost averaging, as investors must understand the fund (or even shares) that they are investing in. They have to know if the falling price is a temporary scenario and whether or not price recovery is likely. If not, there could be instances where the prices will go all the way down. In such cases, dollar-cost averaging, be it into funds or into shares, is highly unadvisable.
What is the Time Horizon for Unit Trust Investments?
I would generally advise investors that any amount of funds that is needed in the next three years should not be invested and be held as cash.
This is because a three-year period is considered short for investment purposes. For any investment, especially unit trusts, be prepared to hold it for at least three years.
The Fund’s NAV is at its All-Time High. Can I Still Buy?
This is one very common question among investors of unit trusts (or even shares). The answer to both can be very different.
I’ll usually explain in this way. Assume that Company A is involved in a banking business and its share price is currently trading at all-time high levels. To decide if it is still worth investing in Company A, investors would need to assess the prospects of Company A’s banking business and whether there is more value upside from investing in Company A.
Company A then decides to sell its banking business and will venture into the property development business. At this juncture, the decision to invest in Company A will no longer be dependent on the prospects of its banking business, but on the prospects of the property development business into which it will be venturing.
How does this relate to unit trust funds? As explained earlier, unit trust funds will invest in a portfolio of shares. Now assume that Dynamic Equity Fund has invested in a portfolio of 50 companies, and that Dynamic Equity Fund’s NAV is currently at its all-time high.
The current all-time high NAV is contributed by the performance of these 50 companies. Whether Dynamic Equity Fund’s NAV can increase further will be dependent on the future performance of these 50 companies.
Now assume Dynamic Equity Fund disposes all the 50 companies and invests in a whole new group of 50 companies. In this scenario, Dynamic Equity Fund’s current all-time high NAV is no longer relevant, i.e., in the sense that Dynamic Equity Fund now has a new group of investments to drive its performance.
This is an extreme example but the point is that as fund managers, we are constantly reassessing the companies in the portfolio. We will either increase or decrease the percentage of our holdings in the fund, or we will replace some companies – with other companies which have better potential – once they have reached full valuation.
The Importance of Knowing the Style of Investment
One of the most important, but often ignored, parts with regards to unit trust investing is whether the investor knows who is the fund manager managing the fund? What is his or her style of investment?
One good indicator of the investment style is the Portfolio Turnover Ratio (“PTR”) as discussed earlier. Consistently-high PTR shows that the investment style is trading-oriented, whereas consistently-low PTR shows that the investment style is more of a buy-and-hold approach.
This is important as investors must ultimately ask themselves if they are comfortable with the investing style of the fund manager whose fund they are investing into. There are fund managers who actively traded shares to realise short term profits, and there are some who prefers to invest more in blue chip companies to realise long term gain. There are also those who go by themes. Bear in mind we are not talking about the right style or the wrong style. Rather, does the investor feel comfortable with the style of investment of the fund manager?
Ultimately, the style of the fund manager plays a more crucial role in determining the performance of the fund compared with the type and mandate of the fund.
So, know your fund manager.