In Part I of this series, we introduced unit trust investing to you, covering the basics of what funds are and how you can invest in them.
In this article, we’ll look for closely into the risk involved in fund investment as well as what an investor should look out for before buying into funds or unit trust.
Like any other investment products, there is a host of risk factors to consider before you buy into a fund. Also, think about your personal risk appetite to ensure that the fund objectives meet your investment objectives.
Firstly, you need to know that funds are not principal-guaranteed. You may lose a substantial amount of the money you have invested in, even if they are CPF-approved funds!
The risks pertaining to the particular fund you choose is usually described in the fund prospectus and product highlight sheet.
Some of the risks involved in fund investing include:
· Market risk – the fund’s investments can be affected by many factors, including the markets they invest in, changing economic and political situations as well as risk in a particular country or sector.
· Liquidity risk – Funds are not popularly-traded as compared to stocks. This lack of liquidity may mean that you are unable to sell the funds at the prices you want.
· Interest Rate risk – bond and debt securities can be particularly affected by movement in interest rates.
What A Fund Investor Should Look Out For
1) Fund Objectives
Each fund will have its own investment objective and strategy. The investment objective can be capital appreciation or income generation. It is important that you choose a fund that suits your investment objective.
Funds can also be classified into specific sectors, e.g. technology, infrastructure and agriculture.
The risks associated with a fund strategy are determined by a combination of the underlying assets, geographical locations as well as the sector.
2) Fees & Charges
Transactions fees and sales charges can eat into your returns. Thus, before you invest in funds, check out the fees that you need to pay.
Broadly speaking, there are two categories of fees:
1) Fees and charges payable by you – these are sales or redemption charges that you pay to subscribe or redeem in a fund.
2) Fees and charges payable by the fund – these are yearly recurring fees that the fund will have to service.
The second category (recurrent fees) makes up the Total Expense Ratio (TER). The TER is usually between 1% and 2.5% of the fund’s NAV.
Generally, you will need the fund to make more returns than the TER for you to earn some profit.
3) Fund Performance
As with all investments, investors should research a fund’s past performance. You can find this information in the fund report. Look out for the Sharpe Ratio, which is an indicator of the risk-adjusted performance of a fund.
The higher the ratio, the better the fund’s returns as compared to the risk taken. You may also want to take a look at the 52-week high and low to have a gauge of the volatility of the fund.
While past results are not a guarantee of future performance, you may want to consider a fund that delivers results that were consistent with general market returns over the past years.
As with all investment products, look for one that suits your investment objectives and returns. With the variety of funds available, you can be sure to find one that suits your needs!