Mutual funds are thought to be synonymous with investments. But do you really know what it actually means and how it works?
Investing always gets hold of Singaporeans’ interest. People tend to value finding alternative ways to earn more and save more. Folklore of Finance research proved it when Singaporeans topped the financial literacy test. However, only 5 per cent of investing Singaporeans genuinely believed they were ready to achieve their investments goals.
According to the same research, Singaporeans often give credit only to themselves for successful investments. 66% of investors claim that their best investments are only due to their decision call. It only reflects that most investors do not value the importance of soliciting professional advice. Also, they do not value getting further education on investing. Since there is a very high level of pride, they are usually afraid to ask questions about things which seem to be common knowledge among other investors.
If you usually ride the MRT, there is a high chance you have encountered sleek looking financial advisors. They try to sell mutual funds, which seem synonymous with investments. However, most Singaporeans will not admit that mutual funds puzzle them. So, here are the basic things you must know.
A portfolio is a collection or grouping of financial assets. It can be bonds, stocks, funds counterparts, and cash equivalents. Moreover, investors keep their own portfolios. It includes Risk Tolerance or the level of returns variability the investor is willing to withstand and the investment objectives.
Mutual funds itself is a portfolio of assets. However, unlike personal portfolios, it contains collective investments involving hundreds of people. In addition, it gives small investors access to financial assets managed by professional fund managers.
Though this involves a lot of people, each one has an equal proportion of gain or loss. They can access the portfolio and see the investment objectives, which should ideally match its prospectus. Funds have an obligation to declare information that may affect the investors’ decisions.
You can purchase the mutual fund units at the fund’s latest Net Asset Value (NAV). NAV calculation is by dividing the total value of the securities in the whole portfolio by the total number of outstanding shares. However, investors cannot just sell their units at their whims. Why? Usually, there are rules on the number of units to be sold and when they can sell these.
Why do you usually hear about mutual funds? Also, why are they aggressively advertised? There is a rave of mutual funds advertisements these days mainly because you can make lots of money with them. For example, if a fund manager is entitled to 1% of the portfolio’s assets a year, it may not seem that big. However, if the assets total $40 million a year, $400,000 will go to the fund manager.
Another reason why it seems to capture the interest of many is the usual behaviour of Singaporeans when thinking about retirement. But, of course, everyone wants to secure retirement at ease. Or even better: an early retirement with the least financial worries.
There can be various lists of top mutual funds existing on the net. However, you should be mindful of how you will choose the one to invest in. Do not just invest in the first mutual fund you encounter. It is better to research its annualised returns over a 10-year period. While a fund manager holds the mutual funds well, that person may not stay there forever. You can change the person managing the fund in a few years’ time. Thus, the performance of the assets in the market may quickly change. It is better to see its performance for ten years to give you a more realistic idea of how it will fare in the future.
Not all mutual funds will show you their comparable rate of return. Therefore, it is better to ask for its Total Expense Ratio (TER). TER is the amount of money you are paying for the management and marketing of the mutual fund. For example, if the fund returns are at 6%, yet the TER is as high as 3%, you gain 3%. Various mutual funds have different TER fees.
The Monetary Authority of Singapore (MAS) strictly monitors Collective Investment Schemes (CIS). Therefore, check the list licensed by MAS when choosing a mutual fund. It only ensures you that your investment will be a legitimate product that is not blacklisted. However, this does not guarantee that this is a quality mutual fund that will yield high returns.
No matter how believable and promising a mutual fund, it is unregulated. So then, your investments are not secured. That’s why it will be hard to go after the responsible people. It is better to talk with a financial advisor to assure diversification. Some investors buy the same assets just. Why? They don’t research well as some shares go in different names, yet from the same company.
Reselling mutual funds may have specific guidelines. So to avoid incurring penalties, check the mutual fund regulations concerning to whom can you sell specific units. While mutual funds can be an excellent investment to save up for the future, they may also damage your finances if you are not careful. If you do not understand the product, it is best not to buy it.