Sunday 22nd October, 2006


Loss, gain a natural flow

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In September 1963, Hurricane Flora hit Tobago. That led to the virtual death of the national cash crop—the agricultural economy—and gave birth to what is now called a tourism economy. Birth and death, in almost everything, follow each other, just like loss and gain.

It is the time interval, between loss and gain, in matters of financial planning, that makes the big difference between overall success and failure. So there is a need for constant vigilance and action.

Innovative products come on stream, so consumers jump on the band wagon and dare to adventure, with the hope of higher returns.

Bank’s accuracy

Some bank savings accounts provide quarterly statements so you can see a written report of how your savings and spending either leads to net growth, or nothing. In practice many bank account statements are never scrutinised or reconciled by the consumer who tends to rely on the accuracy of the bankers.

Mutual funds typically furnish a quarterly statement. Many people do not read their mutual fund statements, and some find it confusing. Sometimes even after years of participation, they still do not understand the concept of units in mutual fund accounts.

Individuals may take a cue from the word mutual itself. Mutual means that there is something common between two parties, something shared, between the investor and the company. This thing that is shared is in the unit.

The mutual fund management company uses the money you have invested to purchase, on your behalf, a number of units. The unit is an imaginary thing, which has a price tag, and carries some risk. That too is shared.

Commonly a unit may be priced at $20. When you invest $100,000 with the mutual fund company, they will deem that you have purchased units at a cost of $20 per unit.

Management costs

The price of each unit, fluctuates with the gains and losses of the total investment portfolio under management by the mutual fund company, over time.

From your $100,000 invested, three will de deductions of management costs.

As the months and quarters go by, there may be consistent portfolio gains, which outweigh the charges and fees.

This gives rise to the concept of income and growth funds. When there is an increase in the cost or price of the single unit, that is referred to as growth. So if the cost is now $25 per unit, that represents growth of 25 per cent.

Income is an allocation of earnings based on the total investment. So in addition to growth you may get additional earnings on your portfolio, called income.

Growth in unit prices tends to follow growth in the stock market. This is because a significant portion of money is invested by the fund managers in stocks. But the fund managers try to balance the risk by also investing in less risky bonds or other assets.

But it is possible that the total mutual fund portfolio shows no growth, and instead reflects a net decline—in which case you loose.

But to loose is not to surrender. By nature, the human being loves wealth. So after the storm, if there is one, you have to think fast to come up with a new idea, or different route for financial success. The faster the better!

©2005-2006 Trinidad Publishing Company Limited

Designed by: Randall Rajkumar-Maharaj · Updated daily by: Sheahan Farrell