What's the real cost of buying mutual fund?

For first time buyer, it might not be so clear what is the total long term cost being incurred when invests in mutual fund. The most prominent fee that capture attention of consumer no doubt is annual management fee. Typically in Malaysia, an equity fund commands annual management fee of 1.5% while bond fund charges a lesser fee of 1%. As a matter of fact, running a mutual fund involves costs, including shareholder transaction costs, annual trustee fee, investment advisory fees, operation fees, marketing, distribution expenses and etc. Those misc fees together with annual management fee make up the real cost of holding mutual funds. Annually this expense materializes as an expense ratio which is in nutshell merely "annual operating expenses divided by average annual net assets."

This is no way fund house is hiding this figure from investors. This figure can be obtained in their annual report and updated prospectus. The irony is investors more interested in the yearly gain instead of figures being shown in balance sheet and new buyers are often sold to newly launched funds. This ratio need at least a year worth of data to compute.

So why does it matter? Well if under same fund category, it serve as a factor to take into consideration to choose a fund to invest in. The one with higher MER will erode more of your yearly gain and the fund manager in fact need to work harder to beat the index to justify the asking price.

Keep track of your daily expense?

I guess a lot of you have been diligently cranking up your excel file to keep track of your daily expenses to have a picture of your daily cash flow. I would not surprise if 98% of peoples failed to continue on this habit after 3 months because it's simply too tedious and time consuming. At least I do not have a habit to keep receipts(I do keep receipts for buying books, parent medical for tax relief) or remember how much money I have spent on a simple lunch in local food stall where receipts are not always issued.

Having said so, does it mean that we should abandon this practice at all. The answer is no. You at least need to do it for some short period to understand your spending habits. Now it's vital you group your expenses into category such as foods,transportation,entertainment and etc. With this in mind, you do a calculation on net income minus expenses. If your figure is red, too bad you are overspending. So, what should you do next? Apparently, you need to reduce expenses on unnecessary items to get blue figure. After tweaking, finally you have a positive balance sheet. If you stop here, that's fine for short term at least you are not digging deeper into debt hole assume you include your credit card usage in your calculation and settle them promptly. If u are seriously thinking improve your financial status, you ought to do more than this. The magic word is "Save". You got to have a lot more cash before you can use it as tool to accumulate more wealth. How about set up a monthly saving target. I'm asking you to deduct this target from your net salary and keep it a safe place such as a checking bank account. The final step would be you need to readjust your expense against this "new" salary. It's lot harder this time but you got to more prudent in spending your hard earned money.

So, you can throw away your monthly budgeting or daily expense tracking routine and start to appreciate your tool to manage your money.

Prologue

Stop believing wealth management is only for peoples with big pay cheque, indeed is for every one of us regardless you are house wives, students, salesmen, teachers and etc. In fact this knowledge should be included in school curriculum as one of the subject. Recently I read a book about wealth creation, let me briefly share with you one of the concept of that I believe are flag posts for people out there who care about to craft their financial journey.

Here come the 4 level of wealth :
Level 1 : Financial Stability
- You have liquid assets to cover your current expense for at least 6 months
- You are protected from disability, losing job, death by insurance
Level 2 : Financial Security
- You have critical amount of Positive Cash Flow Assets that generate enough passive income to cover basic expense
Level 3: Financial Freedom
- You have critical amount of Positive Cash Flow Assets that generate enough passive income to sustain current life style
Level 4: Financial Abundance
- You have critical amount of Positive Cash Flow Assets that generate enough passive income to sustain your desired life style

So which level are you now in?I would challenge you you find out your actual net worth(total assets minus total liabilities).After all, which level you would like to achieve?