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Funds: ready-made basketsrisk 3 of 5: medium, moves with markets

Mutual fund

Rules, protection and tax below are for China.

What it is

A pooled fund that issues and cancels units directly with investors at the value of what it holds, once a day. A manager decides what to buy and sell, and charges an ongoing charge for it. It is the way most people in most countries have invested for decades, through banks, advisers and pension plans.

The dividing line is active versus index. An index fund copies a market list and charges very little; an active fund tries to beat the market and charges several times more. Study after study finds that most active funds fail to beat their index after fees over ten years or more.

The fee is the one thing you control and it compounds against you every year, which is why cost matters more than the manager's story.

How it works

  1. You buy units at the day's closing value of the holdings; there is no market price during the day.
  2. The manager runs the portfolio; the ongoing charge is deducted from the fund's assets daily.
  3. Income from the holdings is paid out or reinvested depending on the unit class you chose.
  4. You sell back to the fund at the next valuation, usually with the cash in a few days.

The honest pros and cons

For

  • Instant diversification across dozens or thousands of holdings from a small sum.
  • Regular investing is easy, often with automatic monthly purchases.
  • Index versions are among the cheapest ways to own a whole market.

Against

  • Active fund fees are high and most active funds lag their index over long periods.
  • Entry, exit and platform fees can pile on top of the ongoing charge.
  • Once-a-day pricing means you cannot react during the day, which is mostly fine but occasionally not.
  • Some are sold with commission that rewards the seller, not you.

Getting it in China

Mutual fund available

  • Account type: Private pension account (个人养老金) (contributions are deductible up to 12,000 yuan a year, growth is tax free, and withdrawals are taxed at 3 percent)
  • Account type: Securities account at a licensed broker (gains on A-shares are exempt for individuals; dividends are taxed at 20, 10 or 0 percent depending on holding period; a 0.05 percent stamp duty applies on sales)

Wherever you are

  1. Look at the ongoing charge first; anything above 0.5 percent a year needs a strong reason.
  2. Prefer an index fund over an active one unless you can explain why this manager will beat the market.
  3. Buy through a low-cost platform or directly, inside a tax shelter if your country has one.

Try it

Go deeper

Also called

unit trusts, OEICs, UCITS funds, FCIs, toshin, SICAVs, managed funds

Often confused with

  • Closed-end fund: A fund with a fixed number of shares that trades on an exchange like a company; its price can drift from what it holds.
  • Stock index ETF: A fund traded on an exchange that copies a stock market index at low cost.

Learn more, for free

Mutual fund in China · wealth-coop