A poll we did recently has shown that more people prefer Mutual Funds to ETFs.
Mutual Funds (in Malaysia most refer it as unit trusts) do seem easier to get into than ETFs.
But, when we take other factors into account, is it really much better?
Let’s take a look at the comparisons between them - do take note that we use Malaysia’s mutual fund figures and fees, and compare to ETFs in the US market, because there is more availability and liquidity - in Malaysia there's less than 30 ETFs available, although the same concept would apply.
1. Fees involved
There normally is a few fees involved just to set up your account or buy a unit trust. According to RinggitPlus, here are some of the fees that unit trust funds management charges:
Initial fee: typically 0 - 5% or more.
Annual management fee: 0.5% - 2.0%
Trustee fee: Normally included in management fee
Some of the other fees to take note - are switching fees (when you switch funds within the same asset management), and exit/redemption fees (when you sell your units).
So say your average return on unit trusts is 10% a year.. once you deduct these fees, you will be left with perhaps 8% or less... barely overcoming the true inflation that we are feeling which is around 6%.
When you invest in ETFs - there's only an average fee of 0.2% per year. Plus a nominal brokerage fee involved.
2. Reliance on agent / middle person
What if the agent no longer works at the asset management company, what then? You will need to find another trusted agent. But here's the thing, they all come and go...
Plus, there is typically a 1.5% - 2.75% of commission for every transaction.
When you invest in ETFs - you rely on yourself, and yourself only!
3. Liquidity
Mutual Funds are quite liquid compared to many other asset classes/instruments, but it is not as liquid as ETFs or stocks. Sometimes it could take as fast as 3 days, other times up to 7 days to liquidate your account.
When you invest in ETFs - you're able to buy & sell immediately and transfer your cash out through a broker within 1-3 days.
4. Returns over 10 years
The average return of the best performing unit trusts are on average 11.6% per year over 10 years (FSMOne, 2022), while ETFs on the other hand is on average 20% per year over 10 years (Seeking Alpha, 2022).
5. Time commitment
Investing in unit trusts would probably only take a couple of hours in the beginning, setting it up with your agent.
The time needed to make investing in ETF work for you - learning, practicing and finding the right opportunity, will definitely take longer than just investing in unit trusts.
When you invest in ETFs - it takes as little as 1 hour a month once you are competent.
So how do you decide which suits you?
Mutual Funds may suit you IF:
- You prefer to have someone to manage your investment.
- You are okay to pay a higher cost for a lower return investment.
- You CANNOT commit time to learn, invest and monitor your own investment.
ETFs may suit you IF:
- You want to have full control over your investment.
- You want a lower cost investment with higher return.
- You CAN commit some time to learn and invest, also spending 1 hour a month to manage your investment.
Interested to learn more about ETFs?
Join us in our online self-paced class that guides you step-by-step on how you can get started on investing in ETFs.