Fixed fund investment is short for investment of fixed amount on a fixed date. It refers to the fund investment at a fixed date (e.g. 8th day of every month) with a fixed amount of capital (e.g. $10,000) in a specified open-end fund.
Features and Advantages
1. Average Cost and Dispersed Risk
It is difficult for ordinary investors to grasp a good entry point in time for investment. They might often buy at a high price and sell at a low price. If the investors adopt a fixed fund investment approach, no matter how the market fluctuates, they buy funds through a bank with a fixed amount of money on a fixed day in every month. The bank will debit an amount from the investor's account automatically to buy the number of shares determined by the latest net value of the funds. Therefore, the capital to buy the fund is injected at regular intervals, and the investment cost is comparatively averaged.
For example, if you invest $100 to a chosen open-end fund every two months, then the total investment is $600 throughout the year. Every time when you invest, the purchase prices of a unit of the fund are $1, $0.95, $0.90, $0.92, $1.50 and $1.10 respectively, the corresponding number of shares that you buy are 100, 105.3, 111.1, 108.7, 95.2, and 90.9 respectively, which accumulate to 611.2 shares. Thus the average unit cost is $0.982 ($600÷611.2＝$0.982), and the rate of return reaches 12.05 % (($1.1×611.2-$600)÷600×100%＝12.05%), which is better than the situation where 600 shares were bought at $1 per share from the beginning, the rate of return will be only 10%.
2. Suitable for Long-Term Investment
As the investing capital is put into market by several lots, the investors could buy more shares at even cheaper price with a fixed amount buying in batches when stock market is adjusted or heading south. When stock market rises again, the rate of return will outperform that of the one-time investment. Worldwide major stock markets are on uptrend with oscillation in long run, therefore fixed fund investment matches seamlessly with the long-term investment plan.
According to JP Morgan Fleming's research in Taiwan, about 30% of investors choose fixed fund investment, especially 36% of them are at the age from 31 to 40 are. In the light of a survey about degree of satisfaction to investing instruments, the degree of satisfaction of people trading stock in Taiwan is 39.5%. While such degree of single lump sum investment in Taiwanese funds reaches 55%, that of the single lump sum overseas fund investment is 52.5%; and fund fixed investment 53.2%. This further explains that investors are inclined to investment plans which feature with low fluctuation as well as steady rise in investment value in medium- and long-term.
Advantages of Fixed Fund Investment
Firstly, there is no need to be concerned about entry point in time for investment. The motto of investment is "buy low and sell high", but most investors rarely grasp the perfect entry point in time for investment. To avoid loss caused by wrong subjective judgment investors could use fixed fund investment in stock market. It is not necessary to worry about entry point in time, or the market price, or to change the long-term investment plan because of short-term volatility.
Secondly, average investing and dispersed risk. The capital is injected in different stages and the investment cost may be high or low. The long-term cost will be averaged to a low level, and the corresponding risks will be also dispersed to a large extent.
Thirdly, the effect of compound interest is impressive in long term. Earnings from fixed fund investment result from the effect of compound interest. The initial principal will yield interest, and then both produce more profit. With the passage of time, the effect of compound interest will become remarkable. It takes a long time to achieve a good result of compound interest effect in the aspect of fund fixed investment, so it is not advisable to terminate the fixed fund investment because of short-term fluctuation. As long as the market is optimistic in long term, there will be a good opportunity to buy more units of fund when the market is going down. As soon as the market rebounds, investors could make a one-time profit through long-term accumulation of units.
Principle of Fixed Fund Investment
1. Set financial objectives. On an annual basis investor can take out $300,000 or $500,000 as a fixed amount to buy funds. When the net value is high, fewer shares will be bought. When the net value is low, more shares will be bought to evenly spread the entry point in time. This "average investment method" is suitable for pension fund or children's education fund.
2. Select a market with uprising trend. The market, which is excessively low but its fundamentals are good, is perfect to start fixed fund investment. As long as the market presents a good future prospect in long run, investors may consider to start investment even though the market is at its low.
3. Investment period is determined by investment object. Short-term risks produced by rise and fall of stock and fund's net value will be decentralized by compound interest effect of long-term fixed investment. As long as investors could observe the principle to invest fixed amount in long run, the funds will have increase in earnings if they select funds with a relatively high volatility, and high-risk funds are superior to low-risk ones in terms of rate of return in long term.
4. Grasp the opportunity to switch (or redeem) funds. The duration of fixed fund investment is determined by market condition. For instance, you have been investing a fund for 10 years, and the market price reaches a very high point. If the analysis shows that the market may enter into a bearish cycle, you had better switch the fund to another (or redeem the fund). When you are in need of cash, for example when retirement comes, you should pay more attention to the market condition and decide when the investment contract should be terminated.
5. Trust the professional. Do not pay too much concern about short-term rise or fall and the number of accumulating units when starting fixed fund investment. Please consult the professional when necessary.
Issues of Fixed Fund Investment
1. Select Appropriate Funds
You have to think over buying a fund with or without a large fluctuation margin. In terms of a fund with a large fluctuation margin, it is easy to buy more shares when its net value falls at a low level, and there will be a profit as soon as the market rebounds. However, if you happen to redeem the funds at a low price point, you could not increase your profit even using fixed fund investment to decentralize risks during market entry.
A fund with a low volatility margin has a stable performance, so there is no issue of redemption of the units at a low price. However, the average cost of investment may not go down too much, and the ultimate profit may be limited in value.
In fact, short-term risks produced by rise and fall of stock and fund's net value are dispersed by compound interest effect of fixed long-term investment. As long as investors could continue to follow the principle of spending fixed amount of capital on funds on regular basis, they will obtain more earnings when they select a fund with a large volatility margin. Additionally, high-risk funds should be superior to low-risk ones in terms of long-term rate of return. Therefore, trust fund with large volatility will be a good investment option if the investor is ready to seek an investment plan with longer financial term of five years, ten years or even twenty years. For a plan with objectives less than five years, it is advisable for the investor to select funds with stable performance.
2. Formulate Effective Investment Strategy
There is still a difference between fixed-term investment and fixed-term savings on monthly basis. You may use various flexible investment strategies to raise investment efficiency.
(1) To build a portfolio with different funds with long- and short-term objectives
If $500,000 is raised for children's overseas education funds, it is preferable for one to choose stable funds. If investment period is elongated, less monthly contribution will be required, and the proportion of investment could be appropriately allocated in aggressive and stable funds to obtain higher profits.
(2) To adjust investment amount according to financial capability
As working life extends from phase to phase and income elevates to new levels, the total investment amount for an individual or a family may also increase. To give a rise in investment amount at appropriate time is also a method to shorten the investment term and raises investment efficiency.
(3) To consider a new investment portfolio after achieving the set goals
Though it takes a long time for fixed fund investment to show its optimal benefit, when the rate of return has reached the target in a planned investment period, one may inspect the portfolio to see whether there are needs for adjustment. Fixed fund investment is not just a monthly contribution from one's account, but it utilizes simple and flexible strategies to make one's investment more efficient and enables people to attain financial goals earlier.