Below table shows the return of Unit Trusts in Malaysia from 2001 to 2006. I added two columns to the right.
Average return per year is simply return divided by number of years, in this case, n / 5 years ie. 25.9 / 5 = 5.18
Equivalent Compound Return Rate is using the FV formula to calculate what the interest rate would be if you save $100 5 years ago to get the same return. This is the number you should use to compare with Fix Deposit interest rate.
Pit falls ? Not so much on that but some key concepts when reading numbers like this ...
These numbers don't mean much by themselves. You should compare them with other numbers to make more senses and decide course of action. For example;
- Compare with Stock Market indexes. Mutual funds are suppose to outperform certain benchmarks. So a fund is only really doing well when it is BETTER than ....
- Compare with Fix Deposit interest. Are these rates significantly higher than FD through the same period ?
- Compare with Inflation rates. Similar to FD comparison but from a different angle.
- Compare with itself. How are the performances 2002-2007, 2003-2008 etc ? 2007 to 2008 are losing years. If one uses 2001-2006 as the 'BEST' years, then numbers of 2007 to 2008 should also be analysed as the 'WORST' years - as in comparing reward and risk ratio.
Lastly, match past record to today's situation. Index Tracking funds did the best during economy recovering years from 2001-2006. Is today's economy like 2001 ? If yes we should buy ! Or is today more like 2006 where economy is booming but due to doom ? If yes we should probably cash out. Or is today in between ?
Don't know what this is all about ? Apply Dollar Cost Averaging.
Remember that if you apply DCA, above mentioned returns do not apply to you neither.
