223) When to Switch Equity Fund

223) When to Switch In and Out of Equity Funds?

A common question of Unit Trust investors.

When is the BEST time to switch in and out of an Equity Fund?

Let's look at the diagram below.

It will be best to invest into equity fund at point A because the stock market increases thereafter. The equity funds made a good return.

However, if you invest at point B, the stock market had increased and still increased thereafter. It is still good, but not as good as at point A.

What if you invest at point C? After you invest, the stock market drops. You will see losses in your investments.

So, the question you want to know is when is the best time to switch from equity to bond funds?

From the diagram above,
Best time to switch from bond to equity is at point A (lowest)
Best time to switch from equity to bond is at point C.(highest)

What if you had switched from equity to bond fund at point B?
Your investment still makes more money, but not as much as if you stayed on till point C.

What if you had switched from bond to equity fund at point C?
Your investment will lose money as equity drops thereafter.

However, if you had invested at point C, you can still stay invested until the stock market drop to point D and increased up again to point E.

It is easy to decide in the hindsight, after the stock market had moved. However, it is very difficult to decide at the current moment on what the stock market will do next from today onwards.

Equity funds will go higher in the long term. If your investment horizon is long term, do not be affected by the short term stock market volatility.

Below is a diagram of a long term investment comparing bond fund vs equity fund.

Only do the switching if you are sure of the stock market next direction.
If it is going to drop, switch from equity fund to bond fund to preserve your capital.
If it is going to increase, switch from bond fund to equity fund to ride on the good returns.

Do note that the fund managers are already actively managing your investments.
If you are not familiar with the stock market, let the fund manager do their job managing your investments.

Switching in and out of the funds can affect your overall returns and incur additional switching charges.

In conclusion,
Stay invested for the long term as per your investment goal and time horizon.

For more related articles:

222) Does Bond Fund Move Opposite to Equity Fund?
http://highlevelrules.blogspot.com/2019/03/222-does-bond-fund-move-opposite-to.html


22) Bond Price Moves Opposite to Bond Yields
https://highlevelrules.blogspot.com/2017/06/bond-price-moves-opposite-to-bond-yields.html

48) Money Market Fund vs Bond Fund
http://highlevelrules.blogspot.com/2017/07/money-market-fund-vs-bond-fund.html

61) Unit Trust Bond Fund Vs Fixed Deposit
http://highlevelrules.blogspot.com/2017/07/unit-trust-bond-fund-vs-fixed-deposit.html

46) Why You Should Diversify Into Different Fund Types?
http://highlevelrules.blogspot.com/2017/07/why-you-should-diversify-into-different.html

222) Does Bond Fund Move Opposite to Equity Fund?

First, let's understand the basics of a bond and a bond fund.

A bond is a fixed income instrument that represents a loan made by an investor to a borrower.

The borrowers (bond issuers) are mostly companies and governments. The main purpose is to raise money to finance their new projects, maintain on-going operations or refinance existing debts.

The lenders (bond buyers/holders) are investors that has large amount of money and wants to get fixed income from the borrowers.

The Coupon Rate is the return rate of holding the bond.

The Maturity Date is when the bond issuer will return the borrowed money to the bond holder. It can be many years depending on the requirement. For example 10, 20 or even 30 years later.

A Bond Fund is a managed pool of money that Bond Fund Manager used to buy and trade bonds. A Bond fund normally does not have equities.

An Equity Fund is a managed pool of money that Equity Fund Manager used to buy and trade equities. An equity fund normally invested mostly into equities, but also has a small percentage of bonds.

An equity fund is volatile as it is reflected by the volatility of the stock markets. The stock prices move up and down throughout the time. When the economy is improving, the stock prices go higher. When the economy is perceived to be getting worse in the future, the stock prices drop.

Bond market is less volatile than the stock market. A Bond fund receives regular fixed income from the bond issuer. A Bond fund has many bonds with different payments dates, coupon rates and maturity dates. A bond fund value increases steadily over the years.

The main factor that affects the bond prices is the interest rate. When the interest rate increases, bond prices will drop. When the interest rate drop, bond prices will increase.

Here's a typical graph on how a bond fund price move compared to an equity fund.

At certain times, the stock market is up and the bond fund price is also up. At other times, the stock market is down, but the bond fund price still go up.

In conclusion, a Bond Fund price moves differently from the Equity Fund. 

Here is another comparison of 1 Bond fund and 3 Equity Funds.

Different Equity Funds normally will move together as stock markets are more related to one another.



For more related articles:

239) Bond Specification & Calculationhttps://highlevelrules.blogspot.com/2020/03/239-bond-specification-calculation.html

230) Differences between investing into Bond Market vs Bond Fundhttp://highlevelrules.blogspot.com/2019/07/330-bond-market-vs-bond-fund.html

222) Does Bond Fund Move Opposite to Equity Fund?
http://highlevelrules.blogspot.com/2019/03/222-does-bond-fund-move-opposite-to.html
22) Bond Price Moves Opposite to Bond Yields
https://highlevelrules.blogspot.com/2017/06/bond-price-moves-opposite-to-bond-yields.html

48) Money Market Fund vs Bond Fund
http://highlevelrules.blogspot.com/2017/07/money-market-fund-vs-bond-fund.html

61) Unit Trust Bond Fund Vs Fixed Deposit
http://highlevelrules.blogspot.com/2017/07/unit-trust-bond-fund-vs-fixed-deposit.html

46) Why You Should Diversify Into Different Fund Types?
http://highlevelrules.blogspot.com/2017/07/why-you-should-diversify-into-different.html

 221) Average Cost Per Unit Differences

What is the effect on the Average Cost Per Unit (ACU) from Buying at Lower Cost vs After Distribution?

Let us study the case studies below:

Case A:
On 1st January, Adam used $1000 to invest into Fund A at $1.00 per unit.
On 1st June, Adam used another $1000 to invest into the same fund at $0.80 per unit.
What is the ACU in July?

1st January: $1000/1.00 = 1000 units.
1st June: $1000/0.80 = 1250 units.
Total Investment = $1000 + $1000 = $2000.
Total Units = 1000 + 1250 = 2250 units.

Fund A ACU = $2000/2250 = $0.8889 per unit

Case B:
On 1st January, Bob used $2000 to invest into Fund B at $1.00 per unit.
On 30th June, the fund declared $0.1111 distribution per unit.
What is the ACU in July?

1st January: $2000/1.00 = 2000 units.

Total Investment = $2000.
Total Units = 2000 units.

On 30th June, Fund B declared $0.1111 distribution per unit.
New Unit Price (ex-Distribution) = $1.00 - $0.1111 = $0.8889

Distribution Amount = $0.1111 x 2000 = $222.20
Distribution Reinvestment = $222.20/0.8889 = 250 units
Total Units = 2000 + 250 = 2250 units.

Fund B ACU = $2000/2250 = $0.8889 per unit

Is there any Difference? What is the Difference?

Although both funds have ACU of $0.8889 per unit, the actual $ value, the total Net Asset Value (NAV) is different depending on the other information.

Use the Formula:
Total NAV = Unit Price x Number of Units.

Fund B:
It was shown that Fund B unit price is still $1.00 before distribution. 
Distribution is $0.1111.
After the distribution, the Unit Price is lowered to $0.8889.

So Bob now has $0.8889 x 2250 units = $2000.

That is SAME AS BEFORE. No Gain, No Loss.

Fund A:
The total NAV depends on the current Unit Price of Fund A in July.
If the Unit Price is higher than $0.8889, then Adam is making money.

Let's assume the current Fund A Unit Price is $1.00. 
So Adam now has $1.00 x 2250 units = $2250.
That is a GAIN of $2250 - $2000 = $250.

Now, let's assume the current Fund A Unit Price is $0.70.
So Adam now has $0.70 x 2250 units = $1575.
That is a LOSS of $1575 - $2000 = -$425.

Now, let's assume the current Fund A Unit Price is $0.8889. 
So Adam now has $0.8889 x 2250 units = $2000.
That is SAME AS BEFORE. No Gain, No Loss.

Now, let's see what happens if both Adam and Bob invested in the same fund in the same period.

On the 30th June, before the distribution:
Bob has 2000 units at $1.00 each.
Adam has 2250 units at $1.00 each.

On the 1st July, after the distribution:
Bob has 2250 units at $0.8889 each. Total = $2000.

How about Adam? Let's calculate.
Distribution Amount = $0.1111 x 2250 = $250
Distribution Reinvestment = $250/0.8889 = 281.25 units
Total Units = 2250 + 281.25 = 2531.25 units.
Adam has 2531.25 units at $0.8889 each. Total = $2250.

Conclusion:
It is more important to have lower ACU due to buying at lower prices, especially during Market Downturn.  

The Total NAV will be HIGHER if Unit Price goes higher than the ACU.

Not to depend on distribution to lower the ACU. The Total NAV remains the SAME before and after Distribution.


More readings: 


What are the Benefits of Dollar Cost Averaging?
http://highlevelrules.blogspot.com/search?q=dca
Dividend vs Distribution.
https://highlevelrules.blogspot.com/2017/11/dividend-vs-distribution.html

Distribution Reinvestment for Lower vs Higher Value Units
https://highlevelrules.blogspot.com/2018/03/distribution-reinvestment-for-lower-vs.html