When newcomers are first introduced to the concepts of ‘investment’, ‘risk and reward’ and ‘wealth growth’, the most common one they hear about definitely fund investment. Fund Investment is simply a collection of funds from a group of people, managed by a professional manager, and invested in different places, such as stocks, shares combined with bonds and currencies. As a result, fund investment has relatively low risk and stable returns.
However, since it is a financial investment product, there are definitely risks involved. Some people highly recommend funds for their ‘diversification’ feature, while others feel that the returns on fund investments are not worth the money.
What exactly is involved in investing in funds and is it suitable for newcomers?
This beginner’s guide provides an overview of what funds are, the pros and cons of investing in funds, and how to choose a fund. Build up your knowledge of funds first so that you can subsequently make decisions from personal risk and return when choosing investment products.
What is a fund?
A fund, also known as a unit trust, trust fund or mutual fund, is a type of financial investment commodity, just like stocks, bonds, options, cryptocurrencies and ETFs. Stocks and bonds require you to choose the underlying investment, buy and sell, while fund investment is a group of people giving their money to a professional manager and entrusting him or her to manage, invest and administer it on their behalf.
Of course, because it is a collection of people’s money, investors have no way to specify the underlying investments, the timing of entry and exit, etc. There are restrictions on the operation, and they also have to pay a lot of management fees. However, investors do not need to do their own research and analysis, so it is still popular in the market.
The key roles of a fund.
There are 3 key roles that make up the fund structure: Manager, Trustee and Unitholder.
1. Manager
The fund manager is responsible for setting up and running the fund and preparing regular quarterly and annual reports to update investors on the fund’s performance. A fund management company usually manages several funds at the same time, with the Investment Committee and fund managers of each fund overseeing the investment process, tracking fund performance, adjusting portfolio strategies, etc.
2. Trustee
The trustee acts as the fund’s nanny, responsible for supervising the fund managers, ensuring that the manager invests the funds properly to protect the interests of investors and timely reporting to the regulatory authorities. Each fund has a trustee.
3. Investor (Unitholder)
Investors choose to invest their money in one or more funds and leave it to the manager (the fund company) to diversify it across different underlying funds.
Costs and fees of investing in funds.
Fund investment is conducted by professional fund managers, which is equivalent to hiring professionals to help you manage your investment, so there are more costs and fees to pay. The costs of buying a fund are divided into direct fees and indirect fees.
Direct fees are the costs incurred when buying and selling funds, which investors have to pay out of their own pockets, such as Sales Charge/ Application Fee, Repurchase Charge, Switching Charge. Indirect fees are generally deducted directly from the Net Asset Value of the fund and are not levied separately from the investor. Because they are hidden costs, some fund investors are not even aware that they are paying an additional fee. Indirect fees include Management fees, Trustee Fees and other fees.
How to buy funds?
You can buy different funds through banks, online fund platforms, brokers, insurance companies and financial planners. Note that there are different types of funds available through various channels, and there may be different costs and fees.
For example, if you buy funds through a financial planner, you will have to pay an extra commission to the person you are buying from.
Malaysia’s well-known fund platforms include Public Mutual, Kenanga Investors, Amanah Saham, and iFAST Capital (formerly Fundsupermart.com).
Funds (mainly money market funds) are now available on a number of cash management platforms, such as StashAway Simple, Touch N ‘Go Go + and Versa.
Common types of funds and options
It is essential to understand the types of funds to choose the right one for you. Funds are categorised, in broad terms, into public funds and private funds.
As the name suggests, public funds are offer and open to the public, also known as Mutual Funds. The threshold is generally low, a few hundred dollars, and can be buy by ordinary people. This article focuses on public funds.
Private equity funds (Private Equity) are relatively closed, open only to investors who meet certain conditions and have higher requirements for assets and investment amounts, starting from a few hundred thousand to a few million.
The types and choices of funds can be divided by region, such as overseas funds, US funds, etc. They can also be divided into active and passive funds by the way they operate. Active funds are funds where the fund manager makes active stock selection investments based on the investment direction and strategy. In contrast, passive funds are based on replicating and tracking indices and investing passively in specific index components. Index-based funds and ETFs are all passive funds.
In addition, they can also be divided by the type of investment product/underlying, such as Money Market Fund, Bond Fund, Mixed Asset Fund, Equity Fund, Index Fund, etc.
Of course, in addition to these common fund types, there are also Real Estate Trusts (REITs), Hedge Funds, Futures Funds, Commodity Funds, etc.
