Do not buy these mutual funds! “Monthly distribution type funds

The change in lifestyles, such as the remote work of the Corona disaster, has drawn attention to the growing interest in asset formation. In particular, there was a sharp increase in the number of young people in their 20s and 30s opening savings NISA accounts. Against this backdrop, “The Latest Edition: Selecting from These 9 Advice Books for Your New NISA”, the definitive book on the subject, was released on March 16, 2012.

In this series of articles, we will provide an excerpt from the book on how to choose and buy a savings account NISA wisely without making mistakes, for those who want to use a savings account NISA for long-term investment and asset building.

Even beginner investors may be asking, “What is a “Temporary Employee Investment System” (TEM)? Even if you are a beginner in the investment field, you don’t need to worry. We will start with the basics in an easy-to-understand manner, so please bear with us.

Monthly-distributable funds are not suitable for long-term asset building
Monthly-distribution funds” once enjoyed great popularity among individuals, but the boom in new fund launches seems to have already passed.

As the name suggests, this type of fund allows investors to purchase a mutual fund that settles accounts monthly and receive monthly distributions. At one time, the first to tenth largest mutual funds in terms of balance were all monthly-distribution mutual funds, because they offered good dividend payouts (many people mistook them for interest) that were hard to find in the low-interest-rate era.

However, the reality of this mutual fund distribution is not interesting. If the fund does not perform well, it takes the money out of the principal and pays a distribution.

Seeing such a situation, the Financial Services Agency also pointed out the following in its “Financial Report for the Fiscal Year Ended March 31, 2016” mentioned above.

In addition to the fact that the compound interest effect does not work well, it is pointed out as a problem that when distributions are made while the principal is withdrawn, the investment source is greatly reduced, thereby lowering investment efficiency. According to the results of a questionnaire survey of customers, less than 50% of those who own a monthly-distribution mutual fund are unaware that a portion of the principal may be paid back as a distribution,’ and about 50% are unaware that ‘the NAV will decrease by the amount paid.

In other words, “monthly distribution funds” are not suitable for long-term asset building. And half of the clients who purchased them did not understand how this mutual fund works.

In the first place, since a portion of the investment results is distributed every month, the compound interest effect, which is essential for long-term asset building, cannot be expected at all.

However, if a part of the distribution is made by reversing the principle, it would be a different story. And that was rampant in reality.

If you think about it, theoretically that is “wrong”.

If you’re buying a mutual fund that pays monthly distributions, you
There is no such thing as asset building.

If the distributions from a monthly-distributing fund are purely based on investment income, how is it possible to pay out approximately the same amount of money each month?

Of course, there is a risk of price fluctuation in the investments of monthly-distributable funds. Nevertheless, as if it were a fixed-income financial instrument, the fund was able to pay out almost the same amount every month because it was replenished from the principal portion of the fund.

Then, let’s compare the case where the principal amount is reduced to 7,000 yen, for example, by paying out distributions, with the case where the principal amount of 13,000 yen, which has increased by compound interest, is invested without paying out distributions. You can see that the larger the principal, the easier it is to increase your money even with a lower yield.

Therefore, if you were to purchase a mutual fund that pays monthly distributions, you would never be able to build assets over time.

Of course, this type of product is not included in the “necessitate NISA,” but it is one of the first products that should be eliminated from the list of candidates when choosing a mutual fund for long-term asset building.

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