Faith in Banks

As a matter of fact most of us have almost blind faith in banks. This is mostly because banks follow strict guidelines of government polices and international compliance regulations. Keeping money with banks is one of the safest option for us. The first person which comes to your mind when you think of investment is bank representative or bank Manager. Distinguished banks like TD, RBC, BMO, HSBC, JP Morgan, CIBC, Scotia, SBI, Bank of America and many others in different countries are what we trust for anything to do with finance. Banks have to make profit and due to their brand they offer premium services. Businesses, Corporations follow transactions using banks. By virtue of faith in banks, most of us also blindly follow bank advisors and Managers for any financial guidance. We forget that governments and banks also have to make profit and cannot go bankrupt. Banks keep your money and provide you marginal interest and lend it to public or industries and businesses at higher interest. Actually banks are very good option for passive investors who have no time and want money in auto-mode. Bank has its advisors, trained staff, great infrastructure, technology (I hope you understand alot of money is spent in all this and on top of it they make profits). Obviously we trust them. The catch is everything comes at premium. Banks and large financial/investment companies issue Mutual Funds.

Mutual funds are created using pool of money from people who invest. For example if there is a mutual fund ABC, it is managed by a bank(or a financial company) by a Fund Manager who buys multiple stocks  using this large pool of money. This company (e.g. Banks) keep a percentage which seems small (sometimes less than 2%) as Management Fee. This is justified as these financial institutions deploy professionals and infrastructure to manage this money and funds. But these institutions still manage to give you at least 7% returns in general which most of are happy with. 

Why I am not happy with Mutual funds ?

It is all about time and calculations. These funds are generally long term either connected with retirement or child’s education (e.g. RRSP or RESP in Canada). What plays the trick is compound interest over long period of time. $100  becomes $107 after one year and this becomes $114.49 in second year, $122.50 in third year and $140.26 in 5 years at 7%. This is $135 in simple interest. Remember the 2% fee is taken every year when the interest adds up e.g. in the first year it is on $107. Let me consider a stock in comparison. If I would have bought Apple stocks 5 years ago, it was about $50 and now it is $192. So $100 investment would have become $380 (Annual dividends are on top of it). Even if we consider an index fund (e.g. Vanguard Index ETF fund VOO) it was $150 and now $256 (with average dividend yield of 1.54% on top of it)

So it is again a personal choice, mutual funds or stocks or ETFs which have much lesser fee and can be traded in market freely. 

My advise, if you have tried playing with stocks and have little confidence, have a combination of good stocks and ETF. Infact a safe bet is stocks of good banks and renowned companies or even Index based ETFs. For the most passive investor, ETF is still better than Mutual Funds. 

However that is my personal choice, it again depends upon your personal choice and situation. 

Author: Gagandeep Singh