What Type of Fund Should You Invest In?

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What Type of Fund Should You Invest In?

Confused as to how to start investing in funds? Or don’t even know what funds are? We break it down for you.

You want to grow your money, but don’t know how to invest on your own. No problem – Singapore is a finance hub, and there are many funds that can help you out. The problem is choosing the right one. Here’s a rundown of some basic types, so you know which to choose:

What is a Fund Anyway?

A fund pools together the money of multiple investors, and uses that money to invest in different assets. The returns from these investments are split among the fund’s investors, who receive returns in proportion to the number of “units” they have bought in the fund.

Without funds, investors would have to pick assets (stocks, bonds, property, etc.) themselves. This requires a degree of time and expertise that many people do not have. It is also dangerous, as they could make poor decisions and lose their money.

For these reasons, many investors buy units in funds, rather than pick their own assets. There are, however, many different types of funds. You need to pick one that best suits your objectives:

Caveat:

The following are not recommendations to buy. The suitability of a fund depends on the nature of your investment goals. Always speak to a wealth manager or financial advisor before making investment decisions.

1. Equity Funds

These funds invest your money in stocks (also called equities and securities). Equity funds tend to be focused on long term growth of your money. You may invest your money for a five or 10 years, and get a big pay-out at the end. These funds seldom generate constant income, although some do.

There are many types of equity funds. For example, some of these funds invest only in companies with a high market cap, which lowers risks. Others may invest in companies with a small market cap, as there is greater potential for growth.

Equity funds are often used by young investors, who need good returns to beat inflation rate risks and build a retirement fund. It is often less favoured by retirees or older investors, who are more focused on protecting their wealth than growing it.

2. Fixed Income Funds

These funds invest your money in fixed income products, such as bonds or stocks with high dividends. These are called “fixed income” because the assets generate a constant, predictable stream of payments.

For example, a bond may generate interest payments of 5% per year (paid out every six months), and pay back its par value upon maturity. If you buy it, you know exactly what you are getting and when. This is different from buying a stock, in which the value and dividend pay-outs will fluctuate.

As such, a fixed income fund can often generate a constant stream of pay outs. Its ultimate returns may not be as high as equity funds, but you will be getting a side-income from it.

Fixed income funds tend to not perform as well against inflation, as the pay outs from their assets may not rise with the cost of living (e.g. a bond will not pay you more interest just because inflation rates are rising)

However, they are much appreciated by older investors who dislike the volatility of other funds.

3. Money Market Funds

These funds invest in short term debt (less than one year) from large banks, governments, or other major financial institutions. It’s one step up from simply putting your money in a bank account. Because the financial institutions involved have high credit ratings, and the loan terms are so short, this is a low risk and low return investment.

In fact, some would claim money market funds are not investments at all; they are just places to park your money, until you find a better option. For example, in the event that the stock market is especially volatile, a financial advisor may tell you to leave your cash in a money market fund for the time being.

This will provide higher interest than your bank’s savings account, often in the range of 0.375 – 0.75%. At the same time, your wealth will be well protected.

Of course, this is hardly a spectacular return that will keep pace with inflation.

4. Global Funds

A global fund can be like any one of the above, but with a difference – these funds do not invest your money only in Singapore. They may invest the money in stocks in America, China, Europe, other emerging countries, etc.

Some investors argue that these funds are safer because they are more diversified. An event that adversely affects Singapore will not damage your entire portfolio, as some of your assets are located abroad. However, there is no decisive evidence to show that these funds are safer (after all, it also means events that happen elsewhere in the world can affect your investment)

5. Specialty Fund

These funds have a tight focus on a particular industry or region, or may focus on excluding certain investment types. For example, some investors refuse to put money into tobacco related products, or want to put money only into environmentally friendly companies. A specialty fund can try to build a profitable portfolio while respecting such choices.

Other examples are funds that focus on an industry, such as agriculture, electronics, or healthcare. These types of funds are seldom recommended to lay investors, as they are not well diversified. However, they may be favoured by people who know the given industries well.

Finally, a specialty fund can focus on a region (e.g. South America, South East Asia, the Middle East). Again, these types are funds tend to be chosen by people who have specialised knowledge.

Whichever fund you think works for you, speak to a qualified advisor first. Picking a fund may spare you from having to choose between stocks, bonds, etc. but you still need to know how to pick the right one.

If you’re thinking of finding a personal loan for investments, you can compare the best options at SingSaver.com.sg.

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The 7 Golden Rules of Investing: A Beginner’s Guide