Friday , May 24 2024

For long-term investment, should I trade stocks or buy fund certificates?


Each type of investment has its advantages and disadvantages, with trading stocks directly being suitable for those who have the time to research and observe the market, said an expert.

Question from reader Bui Van Dien:

I’m nearly 40 years old this year and plan to invest in stocks with a capital of VND10 million (US$400) or less each month. I have done some research and learnt about the financial market. During this time, I have often been advised to hold stocks for the long term because I do not have much time to actively keep track of the market for short-term trading strategies.

However, I am currently debating whether to trade stocks directly or invest in fund certificates. What are the advantages and disadvantages of these two methods? When it comes to long-term holding, who should trade stocks, and who should buy fund certificates? I hope that an expert can provide clarification on this.

Thank you!

Advice from Pham Le Duy Nhan, Head of Portfolio Management, Vietcombank Fund Management Company Limited (VCBF):

Based on your question, I will divide my response into three parts to address your concerns.

First, I will compare direct stock trading and investing in fund certificates (usually open-end funds).

Stock trading

Open-end funds

Similarity

Both are investment in the financial market, like stocks, bonds, deposits certificates. None have a fixed interest rate.

Difference

Minimum capital

To trade in standard lots, investors need to purchase a minimum of 100 shares. Depending on the price of each stock, this can require a substantial investment.

Besides standard lots, trading platforms also support odd lots, ranging from 1-99 shares. However, trading in odd lots can be more challenging because it depends on whether there are any investors placing corresponding odd lot orders.

The minimum investment amount for fund certificates is VND100,000.

Managing portfolio

Access to information for assessing a company’s financial situation is limited. Investors must independently research potential stocks and bonds (reading news, financial reports, consulting with friends, etc.).

Retail investors typically invest in fewer than 10 different stocks.

The fund management company employs finance experts to meticulously assess companies.

Typically, a fund invests in more than 20 different stocks across a variety of industries, resulting in a diverse investment portfolio.

Transaction

Stocks fluctuate and trades are matched daily and hourly.

Transactions usually occur at specified times, for example, fund certificates at VCBF are traded twice a week.

Transaction fees

There is a fee for each buying and selling transaction, and a tax of 0.1% of transaction value.

There is a selling transaction fee (which generally decreases the longer the investor holds), a management fee, and a tax of 0.1% of transaction value.

Liquidity

Investors may face the risk of having no buyers.

The fund management company will buy back the asset

In response to your second question regarding the choice between direct stock investment and investing in mutual funds using a long-term holding strategy, here’s my evaluation.

Individuals suited for stock trading are those who are willing to accept high risks, have a deep understanding of finance, and can dedicate time to closely follow the stock market.

Conversely, those better suited for investing in mutual funds are people looking to invest in the financial market but are too busy for continuous market research and tracking. They focus on long-term investment goals, value discipline and convenience, and prefer a diverse investment portfolio.

Lastly, I suggest this method to optimize asset allocation. To figure out the percentage of your asset to invest in stocks at your current age, use this formula:

Risk Tolerance Ratio = (100 – your current age) x 100%

For example, a 40-year-old should have a risk tolerance ratio of (100 – 40) x 100% = 60%. This means 60% of their assets can be invested in higher-risk and potentially more rewarding options, while the rest 40% should go towards safer investments.

*The question and answer are translated into English by AI

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