6 Questions to ask yourself before you invest in Mutual Funds Singapore (& a list of risk free alternatives)
Planning to invest in Mutual Funds? Do you have any idea what they are and how things work with such investments? Well, it’s fine even if you don’t have much of in-depth knowledge about the subject but it is still advised that you start asking questions and know as much as you can before you actually throw your cash out. And with rich financial market in Singapore where you’re approached with plenty of mutual fund investment offers on a regular basis, equipping yourself with all the necessary information can’t be stressed more.
So, here we have a few questions that you must seek answers to before investing in Mutual Funds in Singapore.
1. What Is A Mutual Fund Investment?
Yes, it’s probably the very first thing you should be asking yourself before you decide to make an investment. Obviously, there is no point in investing money in something that you don’t have any in-depth knowledge about and then losing it.
Well, a Mutual Fund refers to an assets’ portfolio for which the participants pool the money collectively for investment. There are some main features that you can find in every mutual fund and they’re listed below:
- They’re collective investments. Mutual funds are usually sold to several hundred or several thousand people who’re ready to pool the money for investment.
- A professional manages mutual funds. The day-to-day operations of these funds are not in the hands of people who make the investments; in fact, a professional fund manager is given this responsibility. And, sometimes, it’s a computer as well.
- Investors buy ‘units’ in a fund. When investing in mutual funds, you’re actually not buying the bonds, stocks, or anything like that. Instead, you’re buying the ‘units’. The Net Asset Value of the mutual fund determines the price of these units. Some rules can also be set forth to govern when and how much of the units can be sold.
- There’s a prospectus designed for investors as well. This prospectus carries all the details of the fund, the reports about the different assets as well as its past performance. It is obligated for mutual funds to disclose all the information which can impact the decisions of the investors through this prospectus.
2. Why are Mutual Funds So Popular In Singapore?
When investing in Mutual Funds in Singapore, that’s probably one of the most obvious questions you should ask. Well, there are several reasons for that and we have a few explained below.
First of all, it’s quite a lucrative investment and both fund managers and the sellers can make lots of money with it. For instance, every year fund managers can make almost 1 percent of managed assets portfolio of the fund. Now that might appear a small figure but it gets bigger when the funds’ assets total to around S$35 million or more.
Secondly, in Singapore, people are getting more concerned about retirement. With layoffs hitting the record numbers and global economy getting as uncertain as ever, people have financial concerns about their future and they’re looking for alternate solutions.
Usually, mutual funds are presented as supplement to the retirement funds and sometimes they’re themselves positioned as retirement products. And as finance companies might know that already, people tend to take more interest in such products in hard times.
3. Which Mutual Fund Would Be A Good Investment?
To be honest, this is a decision that only you can make as it depends on everyone’s unique circumstances. However, you shouldn’t just buy the very first product that you may come across. Instead, shop around and make the right choice.
With some mutual funds, you might get a comparable return rate, for quite low Total Expense Ratio. The TER refers to the amount that you have to pay for the funds’ management and marketing.
Now that means, if your mutual fund is returning a total of 5% and its TER value stands high at 2% then your returns will only be 3% actually. But when you shop around to get a fund with comparatively lower TER, even with the same returns, it would definitely be a better choice.
So, make sure you’re putting your money at the best available deal. You can easily come across thousands of mutual funds at a time and it’s always better to compare them before making the final choice.
Another thing that you should try to figure out before investing in a fund is its annualized returns for a period of 10 years. It will give you a more realistic look at the performance of the mutual fund you’re interested in.
4. Am I Investing In A Legitimate Mutual Fund?
Yes, it is important to know whether you’re investing in something legit or not and there are quite a few indicators that can help you in making a decision.
Firstly, you should ascertain that Monetary Authority of Singapore regulates your chosen product.
It’s necessary for Collective Investment Schemes to be licensed by MAS. So, you should check the watchlist with them for ensuring you aren’t investing in something that is blacklisted. To eliminate any kind of doubts, simply email or call at MAS helpline to check with them.
Never buy into the mutual funds or investment products that are not regulated by the concerned authorities. As you’re usually required to sign a contract at the time of buying-in, it may be hard for you to hold sellers accountable later.
If you’re currently working with a wealth manager or financial advisor, make sure you consult with them first and then decide whether you should buy the product or not. Often times, mutual funds can have assets which you might’ve invested in already. For instance, you can come across quite a few Investment Linked Policies that have blue chip assets, like shares in Singtel and DBS. So, choosing to buy into such mutual funds would mean that you’re buying something twice.
It is always advisable to get some help from the experts in case if the mutual fund matches your current portfolio.
5. What Happens If I Decide To Take My Investment Out?
You should first know for how long you want to keep the money in the mutual fund you’re going to invest in. Besides, you should also know what happens if you change your mind or need to pull your investment out part-way.
Most of the mutual funds have certain rules in place regarding when your units can be sold and to whom you can sell them. Sometimes, there are penalties involved in selling the units and on other occasions you’re just not allowed to sell. So, you should consider every aspect before actually making the investment.
6. What Rules Are In Place For Cash Outs?
Here again, not all the funds let you to cash out pretty quickly if you need the money back. Some of them have steep fees associated with opting out before a specific period of time while others have a set number of the units that you can be able to sell. Even here your requests are entertained on first come and first served basis. The first hundred people interested in selling their units can sell them, the next hundred people will then be allowed to sell half the units, and the same pattern follows.
These rules are usually set in place because, when things go bad, there might be a big number of investors willing to sell their units and ‘escape’ their bad investment. As a result, the fund could sink even before getting that chance to make a recovery.
So, you should clearly understand all the rules before making an investment. Particularly, don’t buy into a mutual fund that is going to hold your money down for a very long period if you think you might need your cash in near future. This is especially so if you don’t have any emergency savings.
Some Risk Free and Low Risk Alternatives To Mutual Funds Singapore
Well, to be honest, you can’t find many investment options in Singapore that guarantee not just your principal but also the returns. And even from the ones that offer such guarantees, you have to single out those potential scams.
Furthermore, when your investments are safe and the cashflows are visible enough, you should be ready to take a return rate close to a risk-free rate.
As far as risk-free returns are concerned, these are the return rates that can be achieved even without taking risks. Theoretically, no such investment exists because there’s always some sort of risk involved with investments. Nevertheless, given below are some risk-free alternatives available to Singapore-based investors. You can decide to put the money in with guarantee of both your principal as well as the return. So, that’s really a good point to start.
1. Singapore Government Treasury Bills (or T-bills)
Singapore-based investors can find a good risk-free investment option in the return paid by the Singapore government, an economy with triple A rating, on the 1-year term treasury bills which actually are the government security with shortest available term. That’s probably the closest to risk-free rate and offers 1.32% rate per annum. It means your money will be growing by 1.32% every year without you taking any kind of risk with the investment. Learn more about T-bills from MAS here.
2. Singapore Government Securities (SGS) bonds
For longer term investments, the Government of Singapore also issues SGS bonds that span over 2 to 30 years. Typically, these bonds have higher returns as compared to 1-year bonds as they have a bit more risk involved owing to the fact that they’re longer-termed. It’s also considered close to a risk-free investment and that’s why a similar return rate is offered.
3. Fixed Deposits
Even though they’re not usually regarded as an investment, fixed deposits give us an opportunity to get better returns compared to what we’d get by putting our money in some savings account. Remember, however, that many of the banks offering fixed deposits have some conditions that need to be fulfilled for achieving their promotional rates.
Furthermore, deposits with finance companies and full banks in Singapore tend to have Deposit Insurance Scheme cover. It insures a maximum of $50,000 deposits in every account.
4. Singapore Savings Bonds (SSB)
One thing you might have noticed by now is that most of the investments which guarantee both your capital as well as returns are all government-issued fixed income investments.
The Singapore Savings Bonds, on the other hand, pay you a step-up interest every year and this continues up to 10th year. That simply means the bonds have lower return associated to them in starting years and, in case if they’re not redeemed by the investors, the rate continues to increase every year up until 10th year. Primarily, this is in recognition to the longer term for which the bonds are held by the investors.
Furthermore, the recent SSB launch shows 1.26% p.a. 1-year rate of return while it goes as high as 2.16% p.a. for 10-year rate. It’s just slightly lower compared to the latest launch of Singapore Government Treasury bill that offered 1.32% per annum and also the latest launch of 10-year Singapore Government Bond that offered 2.28% per annum.
The simple reason for that is the fact that SSB can be redeemed any time, offering better liquidity for somewhat lower returns on offer.
5. Savings Plans
Insurance companies are commonly known to offer savings plans that can also guarantee not just the capital but the returns as well. Remember, however, that you can also come across savings plans that guarantee the investor’s capital and not the returns.
Investment in savings plans, typically, requires you to lock the money down for a specified period of time or to keep on contributing for a specified period of time. And, if you fail to do that, you may have to bear a significant loss of returns that were expected at the end of the specified period.
The Deposit Insurance Scheme offered by the SDIC in Singapore also covers these plans as well and may even offer the insurance that pays you if something unfortunate takes place.
So, both mutual funds and other risk-free alternatives can be a good choice for you to invest your money in Singapore. Just make sure you have answers to all the important questions mentioned above before you actually make an investment.