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By Yoon Ja-young
Staff Reporter
A paradigm shift is taking place in wealth management as people are pulling money out of bank savings accounts to invest in equity and other types of funds. The asset management industry is set to thrive on the ever-growing demand for these funds.
According to a survey of 928 salaried workers by Open Salary, an online salary information provider, the number of those accumulating assets by putting money in savings accounts dropped by 5.2 percentage points from a year ago, while those investing in funds grew by 5.4 percentage points.
If the typical Korean middle class used to accumulate money in bank deposits and bought real estate with the money to make their fortune, now the answer is investment in a variety of funds. In the 1980s and 1990s, when interest rates hovered at above 10 percent, one was guaranteed an investment return higher than inflation with safe assets such as bank deposits. Now, however, with the annual interest rate at a mere 4 to 5 percent, the investment return is a de facto minus if one depends solely on savings.
While the interest rate for savings accounts is disappointing, some funds have recorded amazing returns during the last few years. Leading the latest boom in fund investment are China funds. Those who put money in China funds at the beginning of this year have reaped over 70 percent in returns so far.
Those who have not subscribed to funds yet, regret that they haven't. They envy the high returns the others boast of, but they are also hesitant about subscribing to the funds now. They hesitate over questions like ``Isn't it too late?'' ``What if the stock market collapses?'' And ``Doesn't it seem too complicated?''
Various equity funds have produced impressive gains that are far higher than those of savings accounts. Will these funds continue to be a goose laying golden eggs? One thing that is clear is that performances will not be even.
On the road toward higher returns, a lot of risks are strewn. Those who are not well aware of, or prepared for those risks might be burned, licking their wounds from investment losses. Here are some useful tips for investment in funds in this era of so-called ``fund capitalism.''
Know Thyself
There are hundreds of fund products prepared when one visits banks or securities firms to start investing. Not a few beginners choose funds by simply seeing a friend enjoying high investment returns, or at the recommendation of banks or securities companies. It isn't that simple. The choice one makes over the short term determines investment returns for years to come.
``Investors should think about how much risk they are willing to take, for how long,'' said Hur Jin-young, a fund analyst at Zeroin. She stressed that one should consider risk management first in fund investment.
Banks and securities companies offer a number of questions to see how risk-averse a person is. Generally, younger people take more risks. Without spouses or children to support, young people can take a more aggressive strategy. They can take high risks to get higher returns. They have time and strength to start again even if the investment ends in a loss. A high risk, high investment tool would be torture to people with low risk-adaptability as they would be having sleepless nights at the slightest fluctuation in the market.
People should also schedule when the money will be needed. If someone plans to get married within a year, for example, putting all their money in funds isn't a good choice as cash will be needed. Fund investment should be a long-term investment.
Diversification
Once one has determined how risk-friendly a person is, there comes portfolio designing. The keyword is diversification: No matter when, don't put all your eggs in one basket. Diversification means less volatility. A part of the money should be kept in stable assets such as savings and bonds, and the rest could seek higher investment returns through equity type funds. The ratio depends on each person.
Even within an equity fund, one should diversify region. Analysts advise that investors had better avoid putting over 30 percent of assets in one region, no matter how rosy the outlook is there. The fund portfolio should be diversified to include ones investing in the Seoul bourse, others investing in advanced markets such as the United States, Japan or Europe, and emerging market funds plus those investing in alternatives such as natural resources and crops.
The recent recommendation on BRICs funds instead of China only funds shows how diversification matters. China funds have brought joy for many investors, and have been absorbing capital. The high price earnings ratio (PER), however, makes investors fear that it might be overvalued. Some refute this saying that it isn't too high when considering the growth Chinese businesses will achieve in a few years, but investors were uneasy when the Shanghai Composite Index fell 4.8 percent last Thursday, upon the possibility of an interest rate hike on inflation concerns.
Analysts say BRICs funds, investing in Brazil, Russia, India and China, can be an alternative to China funds. These funds bet on the high growth potential of emerging markets, including China, while not putting all of their eggs in the China basket. The other three countries' stock markets haven't rallied as much as China recently, but abundant natural resources in Brazil and Russia make their economies go their own way.
According to Shinhan BNP Paribas Investment Trust Management, stock markets of advanced countries have an average 0.75 correlation coefficient among themselves. The coefficient among BRICs countries, meanwhile, stands at between 0.2 and 0.5. This means European stock markets are likely to collapse when the U.S. market plunges. Diversifying a portfolio into Europe and the United States only would not help much. By investing in countries that are not much correlated between themselves, meanwhile, one can make up for losses from other solid markets even if one of them goes bad.
Long-term Investment
Another way to diversify investment is to pay money in installments. Investors don't have to worry about short-term fluctuations if they make investments in installments, over a long period of time. If the market is bullish at the time they put the money in the fund, it lowers the average cost of the investment. Installment investments do not guarantee better returns than a lump-sum investment, but they are safer.
Analysts also stress that fund investment should be made over the long-term. Expecting too much in returns, pouring money into a certain fund for a short period of time is not investment but rather speculation and gambling.
There are good days and bad days on the market. In the long run, however, the market has been growing. Once the investor makes a decision after thoroughly checking the value and growth potential of a certain fund product, they shouldn't fret about short-term ups and downs. They will gain in the long run if market fundamentals are good. Switching funds too often also results in waste through commissions.
Vigilance
Long-term investment doesn't mean one shouldn't oversee what is going on with the funds. One should check returns from time to time and gather a comprehensive outlook on the market. The Korean stock market, which had a rally like the Chinese bourse, had a nosedive after the Seoul Olympics in 1988. It lost momentum for a decade after then. Adhering to the Japanese market during the country's lost decade would not be a smart long-term investment. One should know the direction of a graph though short-term fluctuation doesn't matter. One could consider withdrawing part of the money when reaching an investment returns target to also minimize risk.
Most funds also send investors reports regularly, which is a good source of information for investors to make decisions. A number of Websites, including www.amak.or.kr, www.funddoctor.co.kr, or www.fundzone.co.kr, provide information on funds.
The shift to funds brought a big change to Korean investors. One should keep in mind that funds investment can incur a loss and that the over 100 percent returns of China funds aren't likely to repeat. Funds investment, however, saves time and effort for the investor than direct stock investment, and helps them gain knowledge on the global macro economy.
chizpizza@koreatimes.co.kr
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