Sunday, November 22, 2015

Why Mutual Funds Are Great For First Time Investors


CompareHero.my gives you the lowdown on what you need to know about mutual trust funds and why it’s ideal for first time investors.

What Are Mutual Funds?
Mutual funds (a.k.a. unit trust funds in Malaysia and referred to as such in this article) are an investment method whereby assets management companies (e.g. securities investment trust companies) get capital from the public by issuing specific quantity of shares or beneficiary certificates.

The company then uses the investment from the public as capital for their professional investments. Basically, it is an investment method through the sharing of risks and profits. Among the types of unit trust available are equity funds (the most common type), fixed income funds, real estate investment trusts (REITS), balanced funds as well as syariah funds.

There are risks involved when you choose to invest in them, but you can also decide the risk tolerance level and choose to invest in unit trust with risk ranking from low, medium or high risk.

Why It Is Good For First Time Investors?
Affordability
Unit trusts are affordable and beginners can start with an investment from as low as RM100, depending on the type of unit trust fund you invest in. You can then buy additional units when you have more money and grow your investment.

Regulation
As a beginner in investing, you can take comfort that unit trust funds in Malaysia are under the regulation of the Securities Commission Malaysia which is the sole regulatory body for authorization of establishment of unit trust funds, including the approval of the fund’s management company.

Professional Management

Investing also means that an individual would need to maintain his or her own portfolio of investments. This includes keeping up to date with the financial market information which can be difficult for individual investors.

What’s great about investing in unit trust funds is that it transfers most of the hassle to the professional fund managers. The people who are entrusted to manage the unit trust are all approved professionals whose training and background ensure the decision making will be based on sound investment principles.


Diversity
For those interested in equities but lacking the funds to diversify, unit trust funds offer the opportunity to invest in diversified portfolio with a low starting capital. Rather than investing into a portfolio of only one or two investment or shares, the unit trust portfolio usually consists of a combination among which are cash, bonds & deposits, shares, properties and commodities.

Simply put, the wider the spread of the investments means less chance for volatile investment returns. So investing in unit trust provides a diversification of risk along with opportunity to invest in a diversified portfolio.

Beat The Inflation Rate
You can have the option to invest in low risk unit trust funds, making it a good option for first time investors rather than leaving your money idle in the bank. Investing in unit trust funds can help you beat inflation and make your money work for you as most funds provide potentially higher returns compared to if you were to put your money into a savings account.
How To Choose The Right One? 
The first thing to do is to weigh the risks and merits before deciding on an investment. You do this by reading the prospectus of the company which you are looking to invest into. You need to know how your money will be invested, where it will be put into and also the fees and charges involved.

Among the charges are the initial service charge and the annual management fee. In addition, the key factors to take into consideration when deciding on an investment is the safety criteria, stability, liquidity and the risk-adjusted returns.

When Is The Right Time To Invest?
Before you decide on any investment, you need to set your financial goals. Are you looking to generate a second income or looking to grow your money? If you’re looking to grow your money, ideally it would mean the investment would be a long term investment. If you’re planning for the investment to be a form of your second income, then it would be a short term investment. The next step to take would be to make sure you clear any existing debts before you start investing your money.


Check out InvestSmart by Securities Commission Malaysia for more information and to get the latest updates on unit trust funds.

3 comments:

Unknown said...

Dear Felicity, This article omitted a crucial bit of information ie. fees both upfront and annual recurring charges. Assuming upfront service charges of 2% and recurring annual management and trustee fee of 1.5%, you are out of pocket 3.5% plus your foregone 12 month tenor FD interest of 4%. Right off the bat you are down 7.5%, the fund has to generate better than 7.5% TO MAKE IT WORTH YOUR WHILE.

Also if you are a first time investor you want to go through the learning curve rather than remaining tethered to these professional managers and be on perpetual dependency.

GL said...

Yes one thing that deters me to invest in mutual funds at all is the relatively high fees which it makes more sense to invest ourselves. It's like we've already lost before we started..But nevertheless can be to park some if need be for some if preferable. But the thought about the higher fees is a big deterrent for me personally. ..For first timers would suggest to go for some good blue chips to start with for longer term investing to learn thru ..I had learned the hard way doing short term trades wic doesn't pay as much in the longer run... Once a person is well verse he may be able to spread his risk on a variety of stocks in the portfolio as wat felicity is doing with this portfolio .. Finally it is about stock picking and tenacity to endure thru volatility in this changing world... Always the sky will be much brighter after every storm..Just my thought... :)

YS Wong said...

Agreed 100%, i will avoid the local unit trust due to the high charges. At one time i bought an index fund with very minimum charges but later it had also raised the charges.