Is Buying Mutual funds During Market Downtrend a Good Strategy?

Do you know that a good performing portfolio of securities or mutual funds is a portfolio where it provides you with flexibility to optimize return? In my opinion, if an investor cannot find any opportunities in their investment products, then that product is to be avoided.

Flexibility in this context means the creation of opportunities from time to time in the funds that are invested in. In a downturn market the assets' price declines and that will make the accumulated units or securities more cheaper in value. As a result, the average holding cost of your investment assets will equally head south too. Many sees this as a threat and rational mind investors will promptly unwind their investments by selling them as quickly as possible!

The more the prices fall, the lower your holding cost per unit of asset will be. Let's see the illustration below (GST is omitted for ease of calculation)

Say, you have RM 500,000.00 and you invested in a unit trust scheme. Selling price per unit is RM 0.25.

Sales charge is 5.0% of the invested amount.

From calculation (its working is not shown here), the units that you own is 1904761.92 units. Actual cash invested in fund is RM 476190.48. Sales charge 5.00% in cash term is RM 23809.52

Your cost per unit will be RM0.2625. Note that your cost will not be RM 0.25 per unit cause your actual investment amount is RM 476190.48.

After a year, if you had not made any additional investment, the cost per unit will still be the same as RM 0.2625.

Suppose the fund declares a dividend of 3.50 sen a unit. You will then get a bonus units of 66666.67 units. Now, after adding this units to the existing units of 1904761.92, you now own total units of 1971428.59.

Now, calculate the new holding cost. It is RM 0.2536 a unit.

Can you see how the cost per unit falls from RM 0.2625 to now RM 0.2536?

The act of injecting free units, or otherwise known as dividend distribution is sometime called Dollar cost averaging and it can only alter the holding cost and not the invested capital. The alteration of holding cost (in this scenario) is a good strategy as it lowers down the cost, thus keeping the investment healthy.

So, from the illustration above adding more and more number of units to the existing units can actually bring down the average holding cost, provided that the current market price is always below than the average holding cost.

If the current market's price is above holding cost of RM 0.2536, you stand to get profit when you redeem your units. It bodes well with, "Buy at discount, Sell at premium"!

On the contrary, If the market price moves below RM 0.2536, this fund is now is said to provide you with opportunity to make even higher profit. How? You know how, right?

YES!! You keep buying those cheaper units When the funds actual price moves below RM 0.2536, you inject new cash and as a result of you buying on discount, your new holding cost is also altered - downward!

As the holding cost moves as far as possible downwards, this portfolio or investment is to be said opening up opportunities to you to make handsome profit during upward market. Hence, the larger the differential between lower holding cost and the market price of the units, the better the potential of making good returns will prevail.

REMEMBER THIS, ALWAYS TRY TO BRING DOWN YOUR HOLDING COST AS LOW AS POSSIBLE DURING MARKET DOWNTURN. DON'T PANIC!! WHEN THE TIME COMES FOR YOUR TO REDEEM, WAIT FOR MARKET UPTREND. THEN SELL ALL YOUR UNITS!!