It's All About Liquidity

What happens when you have lots of money in the bank? Quite rightfully, the tendency is to either spend it or invest it wisely. In a macro scale and global financial terms, we call this liquidity.

Back in 2006 and 2007, global financial markets were flushed with liquidity, aided by the sub-zero interest Yen-carry trades. After all, funds were cheap and it was not surprising that investors took the risk to invest in assets with higher returns with lower cost of funds. However, many investors were caught badly burned as the global financial markets collapsed in the wake of the collapse of Lehman Brothers, followed by the massive loss of liquidity.

When funds dried up and there was a massive loss of confidence, investors naturally become risk averse. Markets continue to fall until the first quarter of 2009 amidst this phenomena.

Since March 2009, the outlook has changed drastically, due to massive pump priming by countries around the world and the huge injection of funds by the U.S. Government to bailout troubled financial institutions. Quantitative easing (printing of money) by countries such as U.S. and U.K. has certainly contributed massively to the availability of funds as well.

As a result, global financial markets are now flushed with liquidity. Whether this is artificially created or not is subject to your own interpretation though.

With U.S. economy showing signs of recovery, the U.S. Government has to decide whether it's time to gradually withdraw the stimulus plan. Indeed, this is what comes out of yesterday's FOMC meeting, however, with no specific timeline mentioned yet. Federal Reserve is not likely to do so until U.S. unemployment rate starts tapering off. Bear in mind that with all the talk about U.S. recovery, the unemployment rate is still hanging high at almost 10%!

With liquidity being the major driving factor, any move that could potentially dampen liquidity prematurely may spark another round of fear within the financial sector.

On the other hand, i believe the bull party is ain't over until there is a dramatic change in liquidity. As such, I am quite prepared to hold on to my positions until there is a clear sign of otherwise emerged.

Exchange Traded Fund vs Mutual Fund (Unit Trust)

During an uptrend market like the current, you may consider to invest in an index linked security (alternatively also known as tracker fund) instead of trying to pick the right stock. An index linked security essentially links its performance according to the broad market index performance, such as Dow Jones Industrial Index or Malaysia's FBMKLCI. Locally in Malaysia, there are many index-linked unit trust funds available in the market. However, before you consider parting your money in an index-linked Fund, understand your cost of investment and consider the alternative such as ETFs (Exchange Traded Funds).



ETFs are baskets of securities that trade like stocks on an exchange and are designed to track the performance of an index. Examples are FBM KLCI ETF Fund and MyETF Dow Jones Islamic Market Malaysia Titans 25, the first Syariah compliant ETF in Asia.

Investors who want to buy an index linked unit trust fund may be better off buying the ETF which does exactly the same. The obvious benefit is that the cost of ETF is cheaper. This is because there are no management and upfront fees, unlike unit trusts.

 The upfront fees for unit trust in Malaysia on average is about 3% to 5% but could be as high as 7%!

Besides, a unit trust fund may charge up to 1.5% a year on management fee, which is much higher than the 0.5% charged by the FBM KLCI ETF.

Buying ETF is exactly the same as buying a stock, with the same lot size of 100 units. Unlike unit trust, buying and selling ETF is easy and traded real-time. Dividend is also distributed by ETFs generally on a half yearly basis.

So next time when you were to be approached by unit trust salesperson, find out about the cost of investment first. Don't let the hidden charges affect your fund performance.