Dear Mr Tan,
What is the difference between a bond fund and a money market fund? It seems that both funds pay a rate of return that is linked to the interest rate?
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REPLY:
The bond fund is invested in bonds, using from 2 to 15 years of duration. The yield on these investments is locked up for the period. If the yield on newly purchased bonds drops, the value of the bond fund will increase (as the yield of the fund has been locked in). Similarly, if the yield on bonds increase, the value of the bond fund will drop.
Hence, a bond fund is sensitive to changes in the yield on bonds, and will move in the opposite direction. A change of 1% in the yields on bonds can cause a change of 3% to 10% in the price of the bond fund.
A money market fund is invested in short term investments with a maturity of 1 to 12 months. It will also be impacted by changes in the yields of these investments, but as the locked in period is short, the impact of these changes is small.
Friday, May 25, 2007
My friend likes your blog
Hi Mr Tan
I introduced my friend to read your blog. He likes it. He finds your tips to be useful. He asked me to convey this message to you.
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REPLY:
Thank you for introducing my blog to your friend. Please ask him to tell his friends as well.
I introduced my friend to read your blog. He likes it. He finds your tips to be useful. He asked me to convey this message to you.
---------------------------------------------------
REPLY:
Thank you for introducing my blog to your friend. Please ask him to tell his friends as well.
Swing Fund
A customer invested $25,000 in the Swing Fund (managed by a local bank) in early 2002. After waiting for 5 years, the customer received a return of $25,528. The gain is $528 (i.e 2.1% for 5 years, or 0.4% per year).
The formula used to compute this return is:
(a) 5% for 5 years or
(b) 45% of the smallest absolute performance of 1 stock out of 15 selected stocks.
Among the 15 selected stocks, at least 1 of them showed an absolute loss for the 5 years. So, formula (b) produced nothing.
The investor gets 5% for 5 years under formula (a), but after deducting the sales charge, the net return is only 2.1% for 5 years.
During these 5 years, the return from the 15 stocks is probably 30% or more. The customer gets 2.1%. Where does the difference go?
What is the logic of formula (b)? I cannot understand its logic. It seems to me (and I stand corrected), that it is designed to take advantage of the naive customers.
I cannot understand how the regulators can allow the financial institutions to market this type of complicated product to unsavvy customers. We need stronger protection for consumers.
The formula used to compute this return is:
(a) 5% for 5 years or
(b) 45% of the smallest absolute performance of 1 stock out of 15 selected stocks.
Among the 15 selected stocks, at least 1 of them showed an absolute loss for the 5 years. So, formula (b) produced nothing.
The investor gets 5% for 5 years under formula (a), but after deducting the sales charge, the net return is only 2.1% for 5 years.
During these 5 years, the return from the 15 stocks is probably 30% or more. The customer gets 2.1%. Where does the difference go?
What is the logic of formula (b)? I cannot understand its logic. It seems to me (and I stand corrected), that it is designed to take advantage of the naive customers.
I cannot understand how the regulators can allow the financial institutions to market this type of complicated product to unsavvy customers. We need stronger protection for consumers.
Structured products that have matured
Did you invest in any structured or capital protected products that have now matured? What is the return that you have earned during the past years?
Please send to me, the following details:
* name of product
* when you first invested in it?
* what are the payouts that you have received?
* what is the maturity amount, and date that you received it?
* what are the key features of the product?
I will compute the yield on this product, and to see if you have obtained a fair rate of return.
I will share the experience of these products, so that consumers can be better educated, and learn how to invest in products that give them a fair rate of return.
Please send to me, the following details:
* name of product
* when you first invested in it?
* what are the payouts that you have received?
* what is the maturity amount, and date that you received it?
* what are the key features of the product?
I will compute the yield on this product, and to see if you have obtained a fair rate of return.
I will share the experience of these products, so that consumers can be better educated, and learn how to invest in products that give them a fair rate of return.
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