What You Need to Know Before Investing in Mutual Funds in Singapore
A mutual fund is an investment approach that will allow investors to pool money together to acquire an array of assets in the stock market. Mutual funds offer an avenue of diversification for investors through the pooled funds. Most investments are easy to understand and invest in. However, for mutual funds, it can be rather difficult because you can be sometimes deceived into investing in one without the full picture. Therefore, before deciding to invest in a mutual fund, you should understand how it works in terms of costs and what returns should you expect.
Understanding a mutual fund
As indicated, a mutual fund involves the pooling of resources by several investors. There is a fund manager who will take the pooled money and invest it into various investments. For starters, a mutual fund is a collective investment, and thus, you do not have individual control on the investment portfolio as that responsibility is given to a professional fund manager. Sometime you may not have time to monitor markets, and this is where these funds come in handy as you can still invest your money. However, if you are the controlling type of individual, then this may not be your ideal choice of investment.
Mutual funds are a great tool of diversification because the fund manager will take your money and then invest in various stocks, and in the event, one fails, then the risk will be mitigated. However, diversification does not translate to reduced risks, as there is always a risk associated with an investment in stock and with higher risks comes the potential of higher returns.
Fund managers are professionals, and the success of the mutual fund depends on them because he has the responsibility of buying and selling of assets in a bid to get higher returns. They usually receive a share relative to his investment ratio to the total value, and normally, it is 2% of the total assets of the portfolio.
Why are mutual funds a preferable investment option in Singapore?
Mutual funds are very popular in Singapore because of the returns associated with investing in one on the side of the financial advisors selling them and the fund managers. There are a number of factors that make mutual funds a preferable investment option in Singapore. For fund managers, they are entitled to at least 1% of the asset portfolio they manage at the end of each year. Although the percentage seems small, it is a substantial amount, especially for those managing large assets.
Equally, most people in Singapore are growing concerned about their retirement and with global uncertainties coupled with increased layoffs, people are considering alternative options to invest, thus securing their futures. In most cases, the mutual funds are packaged as retirement funds and sold as retirement products. As a result, financial institutions take advantage of this, especially during hard times.
Mutual Funds are expensive because of hefty fees
Investing in a mutual fund requires as little as $100 a month, but they can be costly in terms of the many fees charged. You are required to pay an initial service charge when you buy a fund, which is usually almost 5% of your investment. When selling the fund, you will also have to pay redemption/realization fee that will cost upwards of 5% of the investment, but if you paid the initial service charge, you would be exempted. There is 1% of the investment charged when switching between funds under the same manager as switching fee as well as an online sales charge of 1% when you purchase a fund online.
Besides the hefty fees charged, there is also a cost of maintaining the fund, which is usually a percentage of the net asset value. The management fee is usually between 1.5% and 2% of the net asset value, and there is also trustee fee charged by the custodian of the fund, and it is normally 0.1% to around 0.15% of the total value of assets. Despite all these costs, mutual funds is still a popular investment option in Singapore.
Why invest mutual funds?
The advantage of mutual funds is that they provide an avenue of investing in specific markets. For instance, if you want to own Apple stock or Tencent stock, and you are in Singapore, the only path to owning shares in such companies is through mutual funds. Similarly, a unit trust is the closest you get to have a personal finance manager. Investments in stock can be time and effort consuming and has its risks. Hiring a professional in the form of a fund manager to do the work for you will give you peace of mind as you don’t have to worry much as a professional is better versed about market dynamics than you.
It is important to note that investing in a mutual fund does not necessarily guarantee high returns because it is challenging even for the experienced fund managers to beat the market. The reason why it becomes hard to beat the market is because of expenses and cost, which increases the expense ratio.
Purchasing a mutual fund in Singapore
There are a number of mutual funds in Singapore, but deciding on the fund to invest in is sometimes difficult. Here are some of the technicalities that you need to understand before making that decision to invest in a mutual fund.
This is the charge you pay upfront to acquire a fund, and it is normally around 5% of the total amount you want to invest.
When you trade a fund, you are charged, and this is deferred as backload or deferred sales charge.
All mutual funds will always have principal expenses; however, not all funds charge those hefty fees.
the fund is divided into units that can be purchases, and each depends on the total value of the fund assets, and it keeps changing like stocks.
This is the minimum amount that you have to invest for you to be considered. Some banks can charge as a little as $100.
A description of the financial products that are being goffered, such as REITs, bonds, or stocks. The most common are Equity funds, Fixed income Funds, and a mix of the two.