Credit Card Companies' Evil Tricks

Some of the worst offenses: Huge fees exceed card issuers' costs and risks. Interest rates aren't disclosed to card applicants. Rates get jacked up even if you pay just hours late.

By Liz Pulliam Weston

Parents spend the first several years of children's lives teaching them how to play fair. By the time we hit elementary school, most of us are pretty good at knowing what's just and what's not.

That sense of fair versus foul, though, tends to get tangled up in the world of credit cards. Some practices that seem egregious at first glance actually make sense when you understand their rationale. Other policies don't hold up so well to scrutiny, even though they're widely accepted in the industry.

What makes matters more complicated is that a few credit card issuers are bad to the bone. Some of the companies that have the most consumer-friendly practices in one area turn around and punish their customers unfairly in another.

After many years of covering this industry, fielding reader complaints, talking to the issuers and listening to consumer advocates, I've drawn up the following list of what I consider fair and foul play, plus what you can do about it.

Mystery interest rates

Fair play: charging different customers different interest rates or offering different terms, based on their credit histories.

Foul play: not telling folks upfront what interest rates or terms they'll get.

If you have a good credit history, you should get a good rate, not one that's been inflated to cover the risks of others who haven't been as responsible.

But no one should have to play Russian roulette when applying for a card. Though some issuers, including Citibank and Capital One, usually tell you in advance what rate you'll get if approved, others -- including Chase, Discover, American Express, HSBC and Bank of America -- typically only offer a range of possible rates. You might get a rate that's in the single digits or one that's over 20%.

"In the best of all worlds, you would fill out an application, be told what interest rate you are approved for, then be given the chance to OK that rate or decline the offer. It rarely works that way," said Justin McHenry, the research director for IndexCreditCards.com. "Oftentimes you won't even know what rate you've been approved for until the card shows up in the mail."

Many times the terms are variable as well. A card may offer 0% for "up to" a year, for example, but once you've applied, you may get the touted rate for as little as three months, said Jeffrey Weber of SmartCreditChoices.com.

Credit limits are almost never disclosed in advance, either. This can be a serious issue for people transferring balances because shifting debt from a high-limit card to a lower-limit card can damage their credit scores.

Your best move: Don't hang on to a card you don't want. Though closing cards can never help your FICO credit scores and may hurt them, the damage isn't likely to be as serious with a newly issued card as it might be with one you've held for many years.

But you shouldn't apply willy-nilly for cards, either, because each application can potentially ding your scores. Also, some lenders may look askance at a borrower who rapidly opens and closes accounts, McHenry said, thinking such customers will be unprofitable.

If you're looking for a lower rate, first contact your existing issuer and negotiate for one. Read "Get a better deal . . . with a threat" for tips. If you plan to apply for a new card, know your FICO scores so you have an idea of what interest rates you're likely to get. You can get a ballpark idea of your scores from MSN Money's credit score estimator; generally, folks with FICOs above 720 get the best credit card rates and terms.

Slanted reports

Fair play: reporting your missteps to credit bureaus.

Foul play: reporting half-truths.

The credit reporting system in the United States has some serious flaws. Creditors wield too much power, and it's too hard for consumers to fix mistakes.

But overall, the system has succeeded in making credit more widely available, which is a boon to savvy consumers. If you get credit and use it responsibly, you can build a credit history that allows you to get the loans you need to buy a home, build a business or accomplish other goals.

What irks me, though, are lenders that deliberately make their customers look like worse credit risks than they are. Some of the worst offenders are issuers that don't report their customers' on-time payment records at all. Next on the list are those that don't report their customers' credit limits, like Capital One.

When a lender doesn't report a customer's credit limit, the bureaus typically use the "highest balance charged" as a proxy for the limit. The problem comes when borrowers charge about the same amount each month.

Here's how it works: If you use $300 of a $1,000 limit that's properly reported, the all-important credit-scoring formulas figure your "credit utilization" at 30%, and that's good. If your limit isn't reported and the highest balance you ever had was $300, it looks like you're using 100% of your available credit -- and that's bad.

It makes sense not to report a credit limit when a card has no preset spending limit, as is the case with many American Express cards. But folks that have those types of cards tend to have pretty good credit to begin with, so the lack of an accurate credit limit on one account isn't likely to hurt much. The people who really get crunched are the people with short or troubled credit histories who are trying to do things right but are unknowingly being penalized by their credit issuers' practices.

Your best moves: If your issuer isn't properly listing your credit limits, you can request that they do so. If your issuer is Capital One, though, you're out of luck. You can either charge up a big balance to reset your "highest balance charged" or switch to another card issuer.

Soaring rates

Fair play: raising your interest rate if you miss a payment.

Foul play: jacking up your rate if you're a few days late.

Late payments can happen to virtually anyone. Payments get delayed in the mail; online bill-payment systems experience glitches; issuers change addresses and payments go awry. Or people just goof.

Goofing to the point of forgetting a payment altogether, though, is rarer. A skipped payment is thus a better indication that someone is having money trouble.

The credit card companies know there's a big difference between late and skipped payments. That's among the reasons payments that are less than 30 days overdue typically aren't reported to the credit bureaus. But many issuers will still take advantage of your mistake by sending your rate skyward, even if your payment arrived only hours (not even days) late.

Your best moves: Don't carry credit card balances. Card issuers have far fewer ways to mess with you when you pay your balance in full every month.

Otherwise, reduce the likelihood of late payments by setting up recurring payments in your online bill-payment system or by agreeing to an automatic debit so at least the minimum payment is withdrawn from your checking account each month. If you use any method other than automatic debit, you'll need to check the credit card issuer's mailing address each month to make sure it hasn't changed.

If you do get dinged with a late fee, or a fee plus a higher rate, talk to your credit card company. Many issuers will waive late fees for good customers. Fewer will rescind the interest rate hike, but you can always try. Some will restore your original rate after 6 months of on-time payments.

Big fees

Fair play: charging late, over-limit and balance transfer fees.

Foul play: charging outrageous late, over-limit and balance transfer fees.

Until the mid-1990s, the typical penalty fee was about $10. Last year, the average late fee was $35, according to IndexCreditCards.com, and many companies charged $39. The average over-limit fee was a hair more than $32.

Some issuers also removed limits on the balance transfer fees they charge. In the past, the typical balance-transfer fee was 3% with a cap of around $75. Today some cards issued by Chase, Bank of America and others have no cap, which means a $5,000 transfer could cost you $150.

It makes sense to charge borrowers something for handling a balance transfer, just as it's justifiable to subject them to some kind of penalty for paying late or going over the limit. It's the amount that's being charged that makes no sense. These fees bear little relation to the costs or risks involved.

Your best moves: Clearly, you want to avoid late and over-limit fees whenever possible. Set up automatic payments so at least your minimum balance gets paid every month. Track your balances -- which you can do online, via phone, by using personal-finance software like Microsoft Money or Quicken, or simply by writing down your purchases and keeping a running tally. (Microsoft is the publisher of MSN Money.) You'll do your credit scores a favor by keeping balances to no more than 30% of your limits.

If you do get dinged, ask your issuer to waive the fee.

Before you transfer a balance, read the fine print and calculate all of the fees you're likely to face. Compare offers using sites such as CardRatings.com, Bankrate.com or IndexCards.com. With a little research, you can often get a better deal. Then use your low rate to help you pay off your balance; don't keep shifting it around.

A whole deck of cards

Fair play: issuing cards with low credit limits to riskier borrowers.

Foul play: issuing multiple cards with low limits to risky borrowers.

Credit card companies wisely limit their risks with certain customers by issuing cards with low limits, say $200 to $500. You're most likely to get one of these cards if your credit history is short or troubled.

As you show you can responsibly use the credit -- by paying your bills on time and not maxing out your card -- a typical issuer will reward you by raising your limit. If you miss payments or go over your limit, though, you don't typically get more credit.

An exception is Capital One. BusinessWeek recently revealed the card company's practice of simply issuing additional low-limit cards to the same customers. The big downside for borrowers is that they have more due dates and limits to track. The practice increases the chances a cardholder will mess up and incur late or over-limit fees.

Capital One has helped a lot of folks rebuild their credit after bankruptcy and other financial missteps. But it needs to drop the practice of issuing multiple low-limit cards.

Your best move: Don't max out your credit cards or charge more than you can pay off in full every month. Instead of accepting a new card, ask for a higher credit limit on the one you have.

Paying twice

Fair play: charging interest on balance transfers.

Foul play: charging interest before the check clears.

This one may be a little tricky to understand, so bear with me.

When you're approved to transfer a credit card balance, the company that's receiving your balance sends a payment to the company that currently has your debt. This payment may be electronic or may be a check.

The issue revolves around when your new credit card company begins charging interest on the balance transfer. Some start doing so long before the balance is actually switched, which means you could wind up paying interest to two companies on the same debt for a week or even longer.

Curtis Arnold of CardRatings.com polled six major issuers -- American Express, Bank of America, Capital One, Chase, Citibank and Wells Fargo -- and found that all begin charging interest as soon as they initiate an electronic transfer to the card issuer holding your balance. That's OK in my book because electronic transfers tend to happen quickly, and the overlap period where you're paying interest twice is usually a day or two, at most.

If the issuer sends a check, though, policies vary. Bank of America, Citibank and Wells Fargo wait for the check to clear before starting to charge interest, Arnold said. American Express, Capital One and Chase begin to levy finance charges as soon as they cut the check. If it takes a while for the receiving bank to get and deposit the payment, you're the one who pays.

Your best moves: Is this a huge deal for a consumer? Probably not. Even with big transfers -- say, $10,000 or more -- we're still talking about only a few bucks a day and a total cost that's less than most late fees. But it's annoying nonetheless. Clearly, you want to try to press for an electronic transfer whenever possible.

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money.

Devote 15 Minutes A Day To Being Cheap

Every bit helps, but frugality doesn't have to be a full-time job. Just chip away at wasteful habits a little at a time.

By The Simple Dollar

Over the past few months, I noticed that on an average day, I spend somewhere around 40 minutes engaged in some sort of activity intended to cut costs. I hang clothes out on the line to dry, clip coupons and so forth, and at the end of the month I see the results of that effort when I add up my assets and calculate my net worth. That time spent day in and day out really does save money.

However, many people blow off the concept of frugality because it's "time-consuming." I argue that all it takes is 15 minutes a day to start seeing some serious benefits from frugality -- big enough benefits that they start making a real impact on your monthly budget.

What can I possibly do in 15 minutes that would save money? Here are 20 simple tasks anyone can do in 15 minutes, and the savings really add up over time. (Got suggestions of your own?)

1. Clip coupons from the Sunday newspaper or troll the Internet for more.

2. Write a grocery list (and stick to it when you shop).

3. Check the air pressure in your car tires, including the spare, and fill appropriately.

4. Hang clothes up to dry instead of using the dryer.

5. Go through the house and turn off all electrical devices you're not using.

6. Make your own meal instead of buying takeout or eating out.

7. Do routine maintenance tasks around your home (change the furnace filter, maintain gutters, fireplaces, garbage disposal, etc.).

8. Make your own laundry detergent.

9. Replace light bulbs with CFLs, compact fluorescent lights.

10. Install a programmable thermostat.

11. Plant and maintain a small vegetable garden.

12. Sell off clutter that you don't need and don't use anymore.

13. Read through your community calendar for cheap or free activities.

14. Drive at 65 or under, even on the interstate.

15. Basic hygiene and health: Wash your hands, drink lots of water, etc.

16. Prepare a meal (or a few meals) to stick in the freezer for easy cooking later.

17. Take care of small financial tasks that you've been putting off (protesting fees, requesting a lower rate on your credit card, switching checking accounts, setting up a 401(k), setting up a Roth IRA, etc.).

18. Clean your car's air filter.

19. Learn how to sew and mend things such as buttons, extending the life of clothing.

20. Attend a garage sale instead of flying off to the mall.

Here's the challenge: For the next 30 days, spend 15 minutes each day doing the things on this list and see how your money is doing at the end of the month. If nothing else, you'll find yourself with more spending money. If you're really swift, though, you'll find better things to do with your newfound cash.

This article was written by Trent Hamm, the founder of The Simple Dollar, a blog offering a peek at his recovery from near bankruptcy.

Published June 18, 2007

Investing 101: Buy Your First Stock Or Fund

You say you want to invest, but you don’t know where to start? This investing primer walks beginners through each step along the way to becoming a shareholder.

By Harry Domash

It's a question we get a lot around here: How do I buy stocks? It sounds simple to experienced investors, but getting started can seem daunting. With this column (and in one to follow), I'll take new investors through each step of becoming a shareholder.

What's a stock?

First, let me answer this question: What is a share of stock?

Corporations sell shares of stock to raise cash to fund their operations. The first time that a company sells its shares is termed its initial public offering (IPO). Most companies make additional stock offerings from time to time to raise additional funds.

When you buy stock, you are buying ownership in the underlying corporation. For instance, if XYZ Corporation has issued 100 shares, and you buy one share, you have purchased a 1% ownership stake in XYZ.

Once a corporation sells its shares, it doesn't receive any direct benefit if its share price goes up further (although its executives may hold shares and thus be motivated to try and increase the share price -- hopefully by making the company more profitable).

The intermediaries

The first step in buying shares is deciding who will help you buy them. The most likely middle-man is a stockbroker, of which there are two main types:

• Full-service brokers offer financial planning and advice on selecting investments such as stocks and mutual funds. They usually have offices you can visit, and an individual broker is usually assigned to each customer. Full-service brokers are the most expensive way to buy shares. You'll typically pay around $70 to buy or sell a batch of shares, compared to $20 or less with a so-called discount broker. That can be money well spent if you don't have the time or interest required to manage your portfolio on your own.

• Discount brokers cater to investors willing to do their own research and make their own investing decisions. Most don't have local offices -- they typically operate online or over the phone -- and don't offer investing advice. Because their trading commissions are low, discount brokers are a good choice if you pick your own funds and stocks. Some brokers, such as Charles Schwab, straddle the line between full-service and discount, operating branch offices and offering some financial advice. Click here to learn how to pick a stockbroker.

Funds versus stocks

There are two basic ways to invest in the stock market: You can buy stocks of individual corporations, or you can buy mutual funds.

The balance of this column deals with mutual funds. In my next column, I'll describe how to buy stocks.

Mutual funds invest the pooled funds of thousands of investors. By investing in mutual funds you gain the advantages of professional management. Because most funds hold dozens, if not hundreds, of stocks in their portfolios, investing in funds also gives you automatic diversification.

That is an important advantage. Even if you're a gifted stock-picker, inevitably something unexpected will happen that will sink the share price of one of your stocks. Such an event could be a disaster if you only own a few stocks, but would be no big deal for a mutual fund holding a hundred or so stocks.

Mutual funds often specialize in specific market niches, such as small companies, health-care stocks, fast-growing companies, etc. You can buy mutual-fund shares directly from a fund company -- such as Fidelity Investments or the Vanguard Group, which offer a variety of fund types -- or through a stockbroker.

Even if you use a broker, you are actually buying from the mutual-fund company itself. The funds are technically freestanding companies. They create new shares when investors buy more fund shares than they sell, and eliminate shares when more shares are sold (redeemed) than bought.

Stock prices rise or fall depending on investor demand. If more people want to buy a stock, its price typically goes up, and vice versa. But mutual-fund share prices reflect the value of a fund's holdings, not supply vs. demand.

Most mutual funds establish minimum purchase requirements. Once you own a fund, you can usually add to your holdings in smaller increments. For instance, the Vanguard 500 Index (VFINX, news, msgs) fund requires a $3,000 minimum initial investment. After that, you can add to it in $100 increments.

What you pay

Unlike individual stocks, where you can trade any stock listed on a major stock exchange through any broker, no broker makes all mutual funds available to its customers. They pick and choose.

But most brokers have more than enough funds to meet an investor's needs. By using a broker, you'll only get one statement each month showing the performance and balances in each of your funds. It's also convenient when you want to sell one fund and buy another, as you will have a much wider selection to choose from.

However, that strategy may be more costly if your broker charges a transaction fee to trade the funds you've selected.

Some funds levy charges known as loads, essentially sales commissions that the fund pays to the financial advisor or stockbroker who sells you the fund. Funds that charge such fees are called "load" funds, and those that don't are "no-load" funds."

Loads can be charged when you buy (front-end loads) or when you sell (deferred loads). Front-end loads, typically 5.75%, are subtracted from your funds right away, reducing the amount that actually gets invested and your gains over the long term.

Those loads eat into your investment gains, so there is no reason to buy a load fund unless you are relying on a financial advisor or broker to help you pick funds. In theory, it's that advice you're paying for.

Managed funds vs. index funds

Managed funds employ a fund manager, who picks the stocks he or she thinks have the best chance to rise in price.

By contrast, index funds attempt to match the composite investment gains of all stocks making up a particular category, such as large companies, small companies or technology companies. Or, in some cases, to match the investment gains of the entire stock market.

Since, in theory, fund managers wouldn't choose obvious losers, you'd think that most managed funds would readily outperform index funds. But that's not necessarily the case. Sometimes they do and sometimes they don't. The relative performance of managed funds vs. index funds depends on the particular index and time period that you analyze.

Here are two no-load managed funds that have consistently outperformed the overall market over the past five years:

• Fairholme (FAIRX, news, msgs): a blend of small-, mid- and large-cap stocks in both the value- and growth-priced categories.

• Kinetics Paradigm (WWNPX, news, msgs): mostly mid- and large-cap stocks in both the value- and growth-priced categories.

• Fidelity Select Medical Equip/Systems (FSMEX, news, msgs): a blend of mid- and large-cap growth-priced stocks in the health-care industry.

Here are two no-load index funds:

• Wilshire 5000 Index Portfolio (WFIVX, news, msgs): It emulates the Wilshire 5000 Index ($TMW.X, news, msgs), which essentially tracks the entire U.S. stock market.

• Vanguard Small-Cap Index (NAESX, news, msgs): It emulates the Russell 2000 Index ($RUT.X, news, msgs), which tracks small-cap stocks.

Index funds vs. exchange-traded funds

Within the index fund category, you have another choice: traditional index funds vs. the new kid on the block -- exchange-traded funds (ETFs).

The primary difference between exchange-traded funds and conventional funds is that ETFs trade just like stocks. You pay the same commissions you would for buying or selling stocks, and there is no limitation on trading activity.

For that reason, active traders prefer ETFs. However, because you pay a commission every time you buy, ETFs are not suitable for investors who want to invest on a regular basis -- say, monthly (a smart strategy known as dollar-cost averaging.)

Here are two index funds available as ETFs:

• Diamonds Trust (DIA, news, msgs): It tracks the Dow Jones Industrial Average, a group of large, established companies chosen by the editors of The Wall Street Journal.

• NASDAQ 100 Trust (QQQQ, news, msgs): It tracks the Nasdaq 100 Index, which in turn tracks the 100 largest nonfinancial stocks listed on the Nasdaq stock exchange.

Buying and selling mutual funds

Many mutual funds have similar names, so it's best to use ticker symbols when you research and trade mutual funds.

Unlike stocks, where you specify the number of shares you want to buy or sell, for mutual funds, you usually enter the dollar value that you want to trade. If you're using a discount broker, most give you -- on their Web sites -- a way of seeing the minimum purchase requirements and applicable transaction fees when you enter a fund's ticker symbol. (Our Easy Fund Screener has similar information.) When you buy, you must specify whether you want dividends and capital-gain distributions from the fund credited to your account in cash or reinvested in fund shares. Dividends are profits paid by companies to their shareholders, in this case, the fund. A fund realizes capital gains when it sells shares of a stock whose price has gone up. Most investors choose to reinvest the distributions.

Conventional mutual funds (not ETFs) trade only once daily, after the market closes. If you miss the deadline for the day you enter the trade, your transaction will be processed after the market closes on the following day.

When you sell fund shares in a regular brokerage account, your broker will tell you whether you've realized a gain or a loss on the sale. You will have to pay taxes on any gains (unless the shares are held in a tax-deferred account like a 401(k)). Your year-end brokerage statement should show your total gains or losses for the year and how to report them on your tax return. Click here for more information on how to minimize the tax bill on your investments.

Mutual funds are a good way for beginning investors to get into the market. After you've got your feet wet, you may want to move on to individual stocks.

At the time of publication, Harry Domash did not own or control any of the securities mentioned in this article.

Tools To Defy The Myth

Creating and enhancing wealth is only half the battle. Will it outlast the proverbial 3-generation barrier?, writes CIMB Private Banking and CIMB Trustee Services.

AS families become more prosperous and their businesses flourish, the task of managing and retaining the wealth and businesses gets increasingly complex. This is why many people believe that the chances of these family-owned money and other assets remaining intact beyond the third generation are slim. Hence we have the Chinese saying: “Wealth never survives three generations.” And there is a Western equivalent: “From shirtsleeves to shirtsleeves in three generations.”

However, CIMB Investment Bank director and head of securities and trustee services Yap Huey Hoong, who oversees matters relating to trustee services such as succession and distribution, points out that a handful of families have avoided this pitfall by coming up with a family holding structure or an estate succession plan.

“Creating a family holding structure for succession requires a lot of thought. Deciding who gets the baton can be difficult and even heart-wrenching, as the choice involves emotions and can at times create friction in the family,” she says.

“We have seen many cases in which the founders, in trying to be fair, have given their children equal shares of the businesses, irrespective of whether they are good at running the businesses, or whether they are even interested.”

It is also common to see many a wealthy founder facing a dilemma when his daughter is far more capable or astute than the eldest son. Yet, the latter is the person most often designated to be the founder's successor. This is especially true among Asian families.

Says Yap: “It is clear that such succession and family structuring decisions are not easy. However, without a proper family holding structure and a succession plan, one is simply deferring a difficult decision to the next generation, thus forgoing a chance to preserve the family wealth and success of the business.”

The affluent, she adds, should seek the advice of professionals when establishing a family holding structure. “Having professional trustee advisors is important as they will devote their full attention to structuring a trust in accordance to one’s personal needs, goals and wishes,” she explains.

For generations, many wealthy American and European families have been relying on trust structures to preserve their family wealth. A trust is a good gatekeeper that can help hold together family businesses and wealth. The founder can use a trust to help him create a family holding structure to protect the business he has built. By doing this, he prevents the family business from being split into fragmented parts, with many different shareholders who may have varying expectations and requirements.

“Using a trust as a family holding structure also ensures that the business and wealth is kept intact and is passed down to the next generations in an orderly manner,” says Yap.

Another advantage of the family holding structure is that it protects the family's businesses and wealth in cases when the family members lack the business acumen to succeed the founder or when they are just too young to manage the wealth.

Yap advises that when identifying a suitable trust holding structure, it is important to overlay this by identifying a decision maker to succeed the founder and to lead the family business or to make decisions relating to the family wealth.

It can take years to work out successful succession planning. Founders or decision makers need to set in place the chosen plan and parameters, groom the successors and monitor their performance.

When picking a decision maker, openness and communication between the founder, the successor and the other family members are important. This includes understanding their own needs and the family’s needs versus the needs of the business.

One has to set clear goals for the successor and there has to be an ongoing inter-generational dialogue between the senior generations and the successors. In choosing a suitable candidate to lead the family business, it is also important to hire career professionals as the company’s managers.

Yap reveals that unlike Asians, Europeans are more willing to accept a professional running the family companies. The Europeans clearly see the hiring of professionals as a solution to keep the family intact and to keep family members away from day-to-day operations, as their participation can lead to disputes.

The Rockefeller family is a well-documented example of the survival of family wealth going beyond three generations.

The Rockefellers are a famous American industrial and banking family. Their wealth was built on a business empire founded by John Davison Rockefeller and his brother, William. This is a classic example of a complicated family business that could have dissipated as the family grew into multiple branches.

Instead, thanks to the founders' vision and plans, the Rockefeller family wealth has survived for over 140 years or six generations. The masterstroke was the setting up of the family trusts in 1934, which have locked up most of the wealth.

A powerful trust committee of decision makers govern the Rockefeller family trust structures. As at November 2006, there are over 160 members of the Rockefeller family, with aggregated wealth of over US$10bil.

This is a valuable lesson for families and founders who do not believe that their wealth can last for more than three generations.

Says Yap, “The failure of a family to preserve its wealth and business is not a curse. With proper preparation and most importantly, early planning and openness and communication amongst family members, this third-generation myth should remain just a myth, at least for those with the foresight to not leave anything to chance.”

Balanced Funds: A Safer Approach To Investing In Volatile Markets

In times of volatile market movements, it is a challenge for some investors to keep their emotions in check. When markets are in a strong rally, our herd instinct compels us to join the crowd and ride with the upside. But when markets correct, we are prone to sell out in panic. Yet, the wisest thing for investors to do at such times may be to remain calm and maintain a focused approach for their investments. Keeping an investment portfolio that is invested across different asset classes is a sound and effective strategy to ride through periods of adverse market movements.

Stock markets are volatile by nature and as illustrated in recent weeks, extended periods of rising share prices can often be interrupted by sudden bouts of consolidation. In such times, investors with moderate risk profiles should consider holding a balanced fund which is invested in both equities and bonds in near equal proportions. Balanced funds aim to provide income and capital growth over the medium to long term period by adopting a balanced asset allocation approach - 40% to 60% of the fund's Net Asset Value (NAV) is invested in equities while the balance is invested in debt securities and liquid assets. In comparison, equity funds generally have asset allocations of 85% or more in equities and the balance in fixed income securities and liquid assets.



The main benefits of investing in balanced funds are:

1. More Stable Returns: The overall portfolio risk of a balanced fund is reduced because the returns of equity and bond investments are generally not positively correlated. The potentially higher but more volatile returns from equity investments are moderated by the fund's investment in bonds. As a result, the returns of a balanced fund should be less volatile than a conventional equity fund.

2. Rebalancing: Another benefit of balanced funds is that in times of rising markets these funds "automatically" rebalance the portfolio by taking profits on equity investments which have appreciated and rebalancing the portfolio to its original equity: bond asset allocation of 60:40. Thanks to this rebalancing process, the unit trust investor need not worry about when to take profits on their investment.

3. Capital growth: A balanced fund will allow the investor to participate in the long term capital growth of equity markets because a sizable portion of up to 60% of the fund is invested in equities.

In conclusion, balanced funds are suitable for medium to long term investors with conservative to moderate risk reward temperament with a preference for receiving income and a respectable measure of capital growth. Investing in a balanced fund helps unit trust investors stay focused on achieving their long term investment goals without requiring them to evaluate the prevailing market cycle. Once they have selected a well-managed balanced fund in line with their risk profiles and investment objectives, they can be assured that the managers of the fund will take the necessary steps to rebalance the fund on a regular basis.

Source: Public Mutual

50th Merdeka Day (MALAYSIA)

Celebrations to usher in the 50th Merdeka (Independence) Day were held in a grand manner nationwide on the 31st August, 2007. It marks the nation independence since 1957 where “Merdeka” was first hailed 50 years ago at Stadium Merdeka by Tunku Abdul Rahman (Father of Independence).

The Prime Minister (Datuk Seri Abdullah Ahmad Badawi) said the country’s independence was fought for by all races in Malaysia and their joint effort had been the basis for the country’s success.

Wishing Malaysia, Happy Merdeka Day and many 50 years to come. We must be thankful for the prosperity enjoyed by so many of us, and may we prosper and develop as a peaceful and stable country.

" Merdeka, merdeka, merdeka !!! "