Local mutual funds, relatively more profitable

Local mutual funds, relatively more profitable

Adler Haymans Manurung Contributor Jakarta

Last week the government reduced the interest rate on the central bank certificate to a one-digit figure: 9.5 percent. Compared to the 12.93 percent rate of interest at the beginning of 2003, this is a sharp decline. This indicates the government's decision to stimulate the national economy by lowering interest rates so that the real sector can grow further and acquire funds from banks.

The interest rate reduction has affected the general investing climate, because, almost simultaneously, banks are also reducing the interest rates on money deposits. Not only businesspeople, but even housewives, are scratching their heads and worrying about the lowering of revenue from their deposited funds. The next question on their minds is where they should invest their money. Will mutual funds be just as productive or perhaps more effective?

Alternative investments that give better returns than deposits, next to mutual funds, are bonds and property.

Investing in bonds, however, poses a problem when one needs cash quickly. The "liquidity" of bonds often depends on the number of bond purchasers, the amount of bonds issued and the reputation or quality of the bond issuer. These are some of the risky areas when one invests in bonds. So, to avoid cash flow problems, one should think twice before investing in bonds.

Purchasing property may seem attractive initially. This type of investment, however, requires a certain skill and foresight. One has to find the right piece of property, in the right location at a price much lower than market standards. Apart from being time consuming, this business is an "art" in itself. Often, it takes a lot of patience to make it pay off.

For a number of reasons, many investors are now turning to mutual funds as the preferred alternative compared to the various methods of investment available in the domestic market.

The first reason is that cash flow is not too problematic, because, although not as instantaneous as bank deposits, the liquidity of mutual funds is within seven days after redemption.

Second, the investor is free from the intricacies of the administration and analysis of investing.

The third reason is that mutual funds are comparatively low in risk, although not as secure as conventional bank deposits. The risk factor is much reduced with the assistance of an investment manager who handles one's portfolio and conducts diversifications of investments to reduce the risks even further.

Reason number four is transparency, meaning as an investor one has the right to all of the information and developments in one's investment. Mutual funds are also audited by registered public auditors twice a year.

The fifth reason is better return from mutual funds mostly due to the diversified investments by one's investment manager. Investing some of the funds in bonds is also often recommended as the return is higher than deposit rates: 13.5 percent annually at the lowest. The happy news is that these revenues are tax-free according to government law No. 6/2002.

Though all these reasons indicate that currently mutual funds are more profitable and hence the path to take for investments, one should always be cautious and work closely with an investment manager to minimize the risks involved. No investment manager, even those with proven track records, can guarantee a totally risk-free investment. So keeping in close touch with every single economic development is advisable.

Another positive result of investing in mutual funds is that one indirectly helps the national economy. In the case of bonds, for example, the company that issues the bonds acquires more capital for expansion, which increases production, employment and so forth, all of which turn the wheel of the national economy faster. Today, even certain regional administrations have issued bonds. Investing in regions with good economic prospects not only enriches you but helps the nation on the whole.

So, instead of the dwindling return from deposits, why not look around for some of the country's healthy investments in mutual funds.

(The writer is director of fund management at PT Nikko Securities Indonesia)^Y