When it comes to investing, investors in Singapore have plenty of options to explore since our country is one of the leading financial hubs in Asia. Experienced investors can choose to invest in a diverse range of stocks or bonds, directly on the Singapore Exchange (SGX).
Investors who prefer a more hands-off approach can also invest via their financial advisers, who will normally recommend unit trusts, also known as mutual funds, for them to invest into. Some financial advisors and more recently, "robo-advisors" may also recommend investing in a portfolio of ETFs.
Unit trusts and ETFs are funds that pool together money from different investors for a fund manager to invest, on behalf of the investors, in assets that they believe generate a return for the investors.
Before you decide to park your money in a unit trust or ETF, it's important that you first understand some of their key characteristics. Doing so can help you identify the right funds to invest in.
Every fund has an investment methodology. This methodology should communicate the approach that the fund managers will take for their investment decisions. For some funds, this could be something relatively straightforward, such as investing in the equities of the biggest 30 companies in a particular country or region or tracking a certain index.
Other funds may have their own investment philosophies, such as traditional active stock-picking, or systematic strategies.
For example, Dimensional Financial Advisors (DFA) is a global investment manager that believes that the market is already able to do what they do best ?reflect all available information into prices. DFA takes a systematic approach to investing and focuses its efforts on creating more value for its clients through its evidence and financial science-based construction of portfolios, delivered in a cost-efficient manner.
They systematically tilt their portfolios to buy more stock of companies with certain characteristics, such as smaller size, value, or profitability. They do so because scientific research has shown that they are the only three proven factors of return that improve returns over the long term. They also believe this is an approach they can stick to, even during challenging market environments.
When you invest in a fund, it's important that you know and understand the investment methodology of the fund and the track record of the fund managers running it. This methodology has to resonate with you. Otherwise, you will be investing in something that does not make sense to you, and when markets become volatile, you may struggle to stay invested.
What the fund is investing in
There is a common misconception among new investors that investing into a unit trust or ETF means you are automatically building in broad diversification for your portfolio. This is not always true. You need to have an overview of what your fund is going to invest in. Typically, this can be segmented into a few key areas:
Location: The area or region the fund invests in. For example, the fund could invest globally or in only developed markets, or focus specifically on regions such as the US or Asia, or just single countries like China (such as the FSSA Regional China Fund)or India (Pinebridge India Equity Fund).
Sectors or themes: The industries the fund can invest in (i.e. technology funds or healthcare) or thematic funds (i.e. ageing or automation).
Asset classes: Some funds invest strictly in equities only. Some funds invest in bonds or commodities. Others take a balanced portfolio approach, with a mix of both equities and bonds for example.
These are just a few broad areas that you should consider before investing in a fund. You should invest in unit trusts and ETFs which hold assets that you are comfortable owning.
You choose the fund, but the fund manager chooses the underlying investments
This simple statement is one that defines what investing in a fund is all about.
When you invest in funds, what you are essentially doing is choosing the fund managers, instead of the actual individual investments. The fund managers then choose what to invest your (and all the other investors') money in. Even fund managers managing passive index-tracking ETFs will make active decisions in choosing a sample portfolio of securities to best replicate the underlying benchmark, because it may be too costly to mimic underlying indices entirely.
It's ironic that many new investors do not pay enough attention to who is managing their money. If people who invest directly are already doing so much research on the assets that they are putting their money into, shouldn't we be doing as much research on the individuals whom we are entrusting our money to?
When you park your money with fund managers, don't take it for granted that all funds are equal. You should try to find out as much as you possibly can about the fund and the fund managers. Remember, they are the ones responsible for investing your money and making a return for you.
The fees you are paying
You invest because you want to generate a return and grow your wealth. However, if you invest through a unit trust or ETF, you will also incur an annual management fee (also known as the fund's total expense ratio). Naturally, these fees eat into your investment returns.
New investors sometimes ignore small differences in management fees, thinking that the difference of 0.5% or 1.0% per annum doesn't really matter. This is wrong.
Consider the example of an investor who invests $100,000 today and earns a return of 7% per annum for the next 30 years. Here's how his returns will be impacted by just a small increase in fund management fees:
- Scenario 1: Fund A charges him a management fee of 1.0%. After 30 years, his portfolio is worth $574,349. He would have paid a total fee of $84,801.
- Scenario 2: Fund B charges him a management fee of 1.5%. After 30 years, his portfolio is worth $498,395. He would have paid a total fee of $116,129.
- Scenario 3: Fund C charges him a management fee of 2.0%. After 30 years, his portfolio is worth $432,194. He would have paid a total fee of $141,521.
The management fee is just one type of fee that you pay. For unit trusts, other common fees include initial sales charges, payable when you first invest, wrap fees, as well as redemption charges, which may apply when you redeem units. For ETFs, you will be charged a brokerage fee when you buy or sell. All these additional costs will eat into your investment returns.
In the example above, you can see that a difference of 1.0% per annum in management fee works out to be more than $142,000 difference in returns over a 30-year period. This is based on an initial investment of $100,000 and a return of 7.0% per annum. If the investment is larger and the returns are higher, the fees will be higher as well.
At Endowus, we believe that for long-term, buy-and-hold investors who do not need intra-day trading liquidity, it may be more effective to invest in unit trusts which trade at NAV, rather than trying to time the market when you invest in ETFs and potentially paying more than what the underlying assets of the ETF are worth.
At the same time, we believe in keeping our costs low, so that our clients keep more of their returns. Our all-in Access Fee is from 0.25% to 0.60%, depending on your assets under advice, and includes advice, investment, rebalancing, transfer and brokerage, all at a fraction of the industry average. On top of this, you pay a fund-level fee of between 0.50% to 0.56%, which is charged by the fund managers out of the fund's daily NAV.