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This is one of the most confusing area which a policyholder might face when it comes to understanding an investment-linked policy. I am not implying that it is very hard to understand, which you will find out shortly just how easy it actually works, but it’s how the concept is being explained by insurance consultants that makes a simple concept difficult to grasp.

Now, let’s take a look on how mutual fund works, and why you must understand the concept of Mutual Fund investment before we can go forward.

How Mutual Fund Works

First of all, I am not going to assume you understand how mutual fund works. So if you already know how mutual fund works, you can skip this section.

A mutual fund is a set of portfolio that consists of various counters (companies) that are listed in the stock market. A highly aggressive mutual fund (also sometimes known as growth fund or progressive fund) usually consists of high growth stocks where the money is invested in stocks that are volatile and hence, it’s pretty high risk. An example would be Public Growth Fund.

On the other extreme would be bond or fixed income funds, where the funds invest mainly in low risk investment vehicles such as money markets, government bonds and corporate bonds. The objectives of bond funds are mainly to provide steady growth and to preserve the investment capital, and hence the returns are much less lucrative than that of a growth fund.

Here’s how a basic mutual fund scheme works.

i) First you have the investors money being pooled together into a mutual fund.

ii) Then you have the Fund Manager who is responsible in making sure the fund makes money.

iii) The Trustee, normally an entity like a bank, ensures that the Fund Manager act according to a Trust Deed which has been mutually agreed by all parties. This is to ensure that no hanky-panky goes on behind the boiler room.

Question: Who bears the RISK of profit or loss from the mutual fund investment?

Answer: Fund Manager of course! WRONG! It’s you, my friend. You are assumed to have read through the prospectus of the fund, and have signed on the dotted line that you’ve approved your cash to purchase the fund. You are 100%, yes you are reading this right, ONE HUNDRED PERCENT undertaking the risk, not the fund manager. They only risk losing their job if the fund underperforms.

So now, having understood what a mutual fund is, we need to understand how the money we invest is being utilized. Unlike going through a stock broker or a remisier, mutual fund fees are being charged upfront when the units are purchased. This upfront fee is also known technically as the Initial Service Charge. Let’s look at a common buy and sell table for a typical mutual fund.

When an investor like you and me purchase units from a unit trust fund, we are always buying at the SELL PRICE. Yup, I know it sounds a bit confusing, but you will get used to it after a while. Just think of the table as being owned by the Mutual Fund Company, so the transactions is always based on the perspective of the Mutual Fund Company. Similarly, when we sell, we are always selling at the BUY PRICE…Got it? Duh…

So in the example give above, say you have RM 100,000. You want to buy into Pacific Recovery Fund. The number of units you can purchase with RM 100,000 will be worked out as follow:

Let’s say the Fund Manager for Pacific Recovery Fund has been performing very well, one month later you have got yourself 300,000 units, and for the sake of simplicity, we refer back to the same chart again, your 300,000 units will be worth:

The difference between the BUY and SELL price is the Initial Service Charge. There will be other charges that you will be paying for, as some of you might be worried if there are any other service charges, annual management fee, agent commission or even hidden fees! That’s that! You only need to watch these two set of numbers- BUY and SELL.

Next, we are going to talk about how Mutual Fund is being applied in the Investment Portion of your Investment-linked Policy.

Related articles:
Investment-Linked Insurance Policy: An Overview- Part 1
Investment-Linked Insurance Policy: How Mutual Fund Works- Part 2
Investment-Linked Insurance Policy: Premium Allocation- Part 3
Investment-Linked Insurance Policy: Insurance Charges- Final Part

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