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Funds Investment
SELECTION OF FUNDS
HOW CAN I CHOOSE WHICH FUND TO BUY?
It is important to do a 3-part homework before you decide on what type of funds to invest in:
Part A - Self assessment of your own financial background
First of all, list out the following:
| Your monthly income and expenditure position |
| Your assets (e.g. properties, stocks, unit trust, etc.) |
| Family obligations (e.g. funding for children's education) |
| Other financial obligations, e.g. mortgages, pensions and insurance agreements |
Part B - To select the appropriate fund sector
Then do a self-assessment on the following aspects:
Investment objectives: What is your investment objectives (income or capital growth) - if your objective is to maximise capital growth, you may consider allocating a higher percentage of your portfolio to equities. However, if you aim to obtain a stable stream of income, you should focus on fixed-income funds, money funds or other products that can provide you with steady income or dividend payout.
Risk/return expectation: Generally, investment must offer higher potential returns to compensate for increased volatility. Thus, if you are going to invest in instruments with higher potential returns, be prepared to accept more short-term price volatility.
If you are close to retirement or if you don't like to experience much volatility, you may wish to choose products that focus on income growth, e.g. bond funds or other products whose objectives are to provide a steady stream of income.
Time frame: Another factor you should ask yourself is how long you can put aside the money for investment. If you are going to use it in the next few days, weeks or even months, liquidity will be the key consideration and you should probably consider putting your money in deposits.
If the money can be put aside for a longer time frame, say over half a year, you may consider taking up some form of investment. If you can put aside the money say for 3-5 years, you are in a better position to invest in equities.
Usually a long-term investor who is ready to wait for a longer time and can accept more risks can invest a higher percentage of their assets in equities. However, an investor who is probably more conservative, and needs to redeem his investments in the short-run, should keep a larger portion of his investment in bonds or cash.
Part C - How to select a fund
Once you have identified the type of funds to invest in, e.g. you would invest in a balanced fund, you should try to obtain more information on funds within this sector. You can do so by reading the relevant funds' explanatory memoranda and financial reports, as well as call the SFC to check the funds' authorization status.
Also, you have to:
| check if the fund's investment objectives specifically match your own and note that risk and returns always go hand-in-hand.
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| compare the fund's performance and volatility against:
| the peers (say via the sector median); and |
| the relevant benchmark. |
You should remember that past performance may not be indicative of future performance.
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| also, you can ask how long the fund manager has been with the fund, and whether the fund manager who has contributed to strong performance of the fund, is still with the fund.
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| the volatility of the fund - a factor that investors always omit. As mentioned before, this is the standard deviation of the monthly returns of the fund from its average; or how much it deviates from its average, and usually the larger the number, the higher the volatility.
You can check the volatility rating, which measures the variability of the fund's performance over the previous few years, usually three years.
Usually the riskier the type of investment involved, the longer you need to put the fund aside. Generally speaking, it is three years for a mixed equity fund and at least five years for a single-country equity fund.
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| fund size - a fund whose fund size is below a certain size may mean that you are bearing a disproportionate share of the overhead expenses. It is generally noted that if the asset size of a fund is below US$5 million, it may not be economical.
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| Investment details - these include fees and charges, as well as purchase, redemption, switching as well as other dealing procedures.
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WHY SHOULD I READ THE EXPLANATORY MEMORANDUM?
You should read the explanatory memorandum or the prospectus before investing because it is a legal document that provides you with details of a fund's objectives, investment strategies, fees and charges as well as other important investment information.
WHAT INFORMATION CAN I FIND IN THE EXPLANATORY MEMORANDUM?
You can find the following information in the explanatory memorandum:
| investment policies and objectives |
| investment restrictions and guidelines |
| characteristics of units, e.g. minimum investment, certification |
| valuation and pricing of assets |
| transaction procedures, including purchase and redemption of units, switching between funds |
| suspension and deferral of dealing |
| fees and charges |
| accounting period and meetings |
| distribution policy |
| taxation |
| base currency |
| means by which modifications to the documents can be effected |
| contact details of the providers: names and addresses of operators and principals including the trustee, the management company, Hong Kong representative, and distributors etc. |
| procedures for termination of schemes |
SELECTION OF FUND COMPANIES
WHERE CAN I GET A LIST OF AUTHORIZED FUND MANAGERS?
The HKIFA maintains a list of member fund companies. However, the list only covers fund managers that are members of the Association and represents about 70-80% of the active fund managers registered with the SFC.
WHICH FUND MANAGER SHOULD I USE?
There are several factors that you may take into consideration before choosing a fund manager:
| its corporate background: you can look at its history, client base, strength as well as total assets under management (both in Hong Kong and worldwide, if applicable);
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| the types of products and services offered: you can check whether the company offers a full-range of products or whether it is a niche player. The former usually allows you greater flexibility to switch amongst different products to capitalize on different investment climate; while the latter may provide you with more specialized services and product types.
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| its investment philosophy and approach: this is important because a fund manager with a more aggressive approach may do better in a bull market. However, a more conservative fund manager may maintain more resilience in a market downturn.
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| Point-of-sales: this will affect how easy you buy, sell or switch funds. The point-of-sales usually include the outlets (can be physical premise or through electronic means) through which you can place an order. |
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