It’s okay if you don’t know what a mutual fund is. But you shouldn’t be too shy to ask questions before investing in one.
It must be sales season in the finance industry. Visit any MRT station in Singapore, and you’re sure to come across a roadshow with a dozen financial advisors trying to sell you a product. Chances are, you’ve probably been approached with dozens of offers to invest in a mutual fund.
Here are some questions you should ask before investing in a mutual fund, but feel too embarrassed to:
1. Wait, What is a Mutual Fund?
A mutual fund is a portfolio of assets, which many participants collectively pool their money to invest in. While mutual funds have many names and descriptions, these are the main qualities that they all share:
- They are collective investments. These products are sold to hundreds or thousands of people, who pool their money to invest in it.
- They are managed by a professional. The thousands of people who invest in the fund have no control over its day-to-day operations; these operations are placed in the hands of a paid fund manager(s). The fund manager is sometimes a computer.
- Investors purchase “units” in the fund. In a mutual fund, you do not purchase specific stocks, bonds, or other such assets. Rather, you purchase “units”, which are priced according to the fund’s Net Asset Value (NAV). There may be rules in place, to control when the investors can sell their units, and in what quantity.
- A mutual fund always comes with a prospectus for the investor. This details what the fund is engaged in, along with reports about its various assets and past performance. Funds have an obligation to disclose information that would affect investor decisions via the the prospectus.
2. Why are Mutual Funds Everywhere in Singapore?
There are many reasons why mutual funds are aggressively advertised right now.
The first is that mutual funds make a lot of money, for the fund managers as well as the people selling them. Consider that a fund manager may make one per cent of the fund’s portfolio of managed assets, every year: that may not sound like much, but if the fund has assets totalling S$35 million, that’s S$350,000 a year.
The second reason is that Singaporeans have begun to worry about retirement. 2015 and (so far) 2016 have proven to be difficult, with record numbers of layoffs and uncertainty in the global economy. In such an environment, more people worry about their financial future, and start to seek alternative solutions.
Mutual funds are often presented as a supplement to retirement funds (like your CPF), or are positioned as a retirement product themselves. And many finance companies know that, in difficult times, people will show more interest in these products.
When times are good, all of this fund stuff is boring and no one wants to listen.
3. So, I Think I Want to Invest in a Mutual Fund. Which One Should I Get?
We’re not in a position to give advice about what mutual fund to invest in. This decision entirely depends on your unique circumstances. But we will tell you not to buy the first mutual fund that is shown to you.
Some funds may be able to give you a comparable rate of return, for a much lower Total Expense Ratio (TER). The TER is the amount you are paying for the marketing and management of the fund.
So if the fund provides returns of five per cent but the TER is high at two per cent, your returns are actually just three per cent. You may, however, find another similar fund with five per cent returns, but in which the fee is just 1.5 per cent (thus securing returns of 3.5 per cent instead).
As with any financial commitment, make sure you are getting the best deal, not just the most convenient. There are thousands of these funds on the market at any one time – make sure to compare your options.
Do not assume the performance you see will be repeated. Bear in mind that fund managers move around a lot – the person who managed the fund and made it a success in 2010 may no longer be around, and the top manager it has today may be gone in three to five years.
Ask to know the fund’s annualised returns over a 10 year period. This is a more realistic reflection of the fund’s performance.
4. How Do I Know If I’m Investing in a Legit Mutual Fund?
First, check to see if the product is regulated by the Monetary Authority of Singapore (MAS).
Collective Investment Schemes (CIS) should be licensed by the MAS. Check their watchlist to ensure you are not investing in a blacklisted product. If you are in doubt, call or email the MAS helpline and make an enquiry.
Do not agree to buy into unregulated mutual funds or unregulated investment products of any kind. Because you are often signing a contract when you buy-in, it can be difficult to hold the seller to account later (you agreed and signed on the dotted line!).
If you have a current financial advisor or wealth manager, consult them before buying the product. Sometimes, a mutual fund contains assets that you have already invested in.
For example, many Investment Linked Policies (ILPs) will hold blue chip assets, such as shares in DBS and Singtel. If you have such an ILP, and you buy into a mutual fund that invests in the same companies, you are basically buying the same thing twice. There’s no diversification in that.
Likewise, some actively managed mutual funds may carry higher risk, as the manager attempts to outperform the market. This may not be ideal for retirees. On the other hand, some mutual funds give consistent but low returns, which may not be ideal for young investors (the returns don’t keep pace with inflation).
Seek expert help to determine if the fund matches your existing portfolio.
5. What Happens If I Change My Mind About My Mutual Fund?
For how long must your money remain in the fund? What if you need to pull your money out part-way?
Many funds have rules about when you can sell your units, and to whom. There may be penalties involved in selling, or you simply may not be able to sell at all. These are all important considerations before you commit the money.
Mutual funds are one of several tools that can supplement your retirement income. But used wrongly, it can have the opposite effect and damage your wealth instead. The simplest rule is that, when you are in doubt or unclear, don’t buy.
If you want to test that, explain the fund to someone else. If you cannot clearly describe it, you don’t know enough about it.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.