Fund Investment: How to pick a good fund for your needs
What is a Fund?
The term fund refers to a pool of funds sourced from various investors that would be invested in various assets. As an investor or contributor to the pool of funds, your returns or income would be commensurate with the number of units you’ve invested in relation to the total amount in the pool. Since earnings are pro-rata, the more units you purchase mean higher sharing for you.
Investing in funds is a great start since other options especially if you’re doing it on your own. Investing in the stock market would require some learning curve and assistance from a licensed stockbroker. Purchasing a property as an investment would need a larger capital. Hence, investing in funds is the most desirable and safest in your quest to grow your money and build wealth.
Features of a good fund
Set a financial goal before making any investment decision. Your objectives should be well-defined so as not to crush expectations. What is important is to spot a good fund. First, know what types of fund are available and its outstanding features. Then see how they align with your risk tolerance and financial goal.
1. Fixed and steady income – Good for capital preservation
For a novice investor, you’d be naturally inclined to pick a fund that is practically risk-free. You will earn a fixed amount for the entire investment period and redeem the principal amount at the maturity date. However, with low or no risk investments, returns are low but steady.
If you fall in this investment group, the Fixed Income Funds is best suited for you. These funds are invested in fixed-income products where you get paid interest every 6 months. The earnings you will receive are the same for the duration of the holding period until redemption date. Usually, the funds are invested in bonds. An example of a risk-free bond is the Singapore Savings Bond (SSB). The Monetary Authority of Singapore (MAS) launched this bond or ‘fixed deposit’ instrument in 2015. Since the bond is government issued, it is the safest and the return of principal is guaranteed. The interest rate is locked-in on the date of purchase and until the maturity date. Your SSB will not be affected by fluctuations in market rates.
2. Long-term growth – Good for retirement planning
Young investors should be looking ahead to the sunset years. Since you have plenty of productive years ahead, your propensity to earn is very strong. An Equity Fund is focused on the long-term growth of your capital.
The fund is also known as a Mutual Fund. As an individual investor, you can place your money in a professionally managed portfolio of equities, bonds and other securities. The stocks selected are those of Singapore companies with high-market capitalizations. Some funds target investments outside the country. Investment period is longer, over 3, 5 to 10 years.
First-time investors are usually enticed by mutual funds. It’s probably the best fit to invest their surplus cash because it’s goal-based. Among the reliable mutual funds are UOB United Global Healthcare Fund and LionGlobal Asia Bond SGD.
3. Short-term growth – Good for capital preservation
If you want a momentary safe house for your money, aside from a bank, while trying to weigh other investment options, you can invest in a Money Market Fund.
The funds are invested in short-term debt, usually less than a year. These are short-term commercial papers and non-negotiable promissory notes of major banks and established financial institutions. The institutions have high credit ratings and therefore the risk is mitigated. Other instruments are government securities like treasury bills. After the placement period, you can move to other investment alternatives with higher returns.
OCBC Savers Singapore Money Market Fund is an example of a money market fund. The funds, about 80%, are invested in instruments with maturities of up to one year. The rest of the funds are invested in bills or bonds maturing in less than two years.
4. Faster pace to grow money, higher returns but moderate to high risk
The flip side of a low-risk investment is low returns. If you want to allocate a portion of your capital in the stock market but still in the process of learning the ropes, you can invest in an Exchange Traded Fund (ETF).
Just like the stock market in the U.S., the ETFs are becoming popular with the younger generation of investors. Besides being introduced to the Singapore Exchange (SGX) stock market, you can expect to receive higher returns. However, you should be willing to take on the risks.
The SPDR Straits Times Index (STI) Exchange Traded Fund (ETF) is a diversified pool of the top 30 stocks on the SGX so you don’t go through the exercise of picking individual stocks. This STI-ETF has been turning in a solid and remarkable performance this year to the delight of local investors. The stocks in the ETF are replaceable. Only the top-performing stocks are selected and included in the basket at any given time.
The Nikko AM Singapore STI ETF is another reputable ETF that aims to replicate the movements of the STI. This fund has been categorized as an Excluded Investment Product (EIP).
5. Investment in hard assets, earn passive income
For investors who are not motivated to invest in a market that is not easily influenced by volatility like the stock market, the property market in Singapore is a smart alternative. The Singapore Real Estate Investment Trust (S-REITs) is your gateway to the into the property zone.
There are various choices of S-REITs according to classification such industrial, hospital/health care, and hospitality/hotel. The Maple Tree Industrial Trust and Ascendas Real Estate Investment Trust are two of the top five performing REITs in Singapore.
You need not have a sizable amount of capital since you’re not purchasing a property. As an investor, you can partake of the rental and lease income generated by the real estate properties in the portfolio mix.
The door to the investment world in Singapore is open. The arena is overflowing with boundless earning opportunities. But before you line up at the entrance, there are a couple of basic rules to remember. First, do not put your money in a fund scheme that you vaguely understand. Second, do some sleuthing on the historical performance of the fund and the track record of its fund managers to deliver. Remember losing money at the onset is not a good way to build wealth. There’s no short cut to reach your financial goal. You will certainly get there, at your own pace and within the time horizon you’ve set.