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Get Acquainted With Funds!

By Fundsupermart

Get Acquainted With Funds!

Get Acquainted With Funds!

Unit trusts (or funds) allow investors to access financial instruments and markets by pooling capital together, and let investors with limited capital invest in a safe and convenient way. It allows investment in a broad basket of sectors, industries and companies. Unit trusts differ in the underlying instruments and markets that they invest in, ranging from simpler bond and equity funds to more exotic types of alternative investment funds. In this article, we introduce the different types of funds available to investors!

Money Market Funds

Money market instruments include short term government bonds, deposits, deposit certificates, bankers’ acceptances and many more that typically range from anything between a few days to a 12-month period. These instruments are essentially short term IOUs, utilised by many participants such as large institutions and companies as a means for borrowing and lending over a short period of time. Due to the ease of transacting and the short-term nature of these instruments, the money market is typically seen as a safe place for an investor to park money for a short period of time.

Money market funds are thus funds that hold baskets of money market instruments. They tend to be have the lowest when compared to all the other types of funds covered in this article. Conversely, they also typically provide the lowest potential for returns. Hence, they are also known as cash-equivalents, and can be treated as an avenue to deposit money for a short period of time whilst gaining higher rates without losing the benefits of being liquid unlike a fixed deposit.

Bond Funds

A bond is an IOU, an instrument that denotes a loan agreement made between a lender and a borrower. Governments, agencies and companies worldwide often raise money from the bond market for financing purposes, and these institutions promise to return the principal amount borrowed by the time the loan ends, with interim interest payments to the lender. These interest payments (depending on the terms of the agreement) are called coupons – are essentially the cash flow that a bond investor receives over the term of the bond. These cash flows are known at the start of the investment, hence the name ‘fixed income’ to denote bond instruments.

Within the universe of bonds, there are various kinds of bonds available. They differ across factors such as the type of the issuer (borrower), length of term, credit quality and currency denomination. For example, bonds that have a shorter-term to maturity are called short duration bonds (typically 3 to 5 years) – funds that only own short duration bonds are known as short duration bond funds. Credit quality is simply known as the “risky-ness” of a bond, and is usually determined by an assessment of the entity that is raising capital. Most bond issues have a credit rating that is assigned by a rating agency. A lower credit rating implies a higher level of perceived-risks as compared to a bond with a high credit rating. Interest rates of riskier bonds also tend to be higher than the rates on their lower-risk counterparts to compensate for additional credit risk.

Bonds tend to be considered lower risk as compared to equities; barring a default by the entity who borrows money, a bond investor would get back their money upon maturity of the bond, with the interest payments as their return on investment.

Bond funds are thus funds that invest in baskets of bonds. The different types of bond funds available depend on the underlying types of bonds that the funds invests in. They differ in their geographic focus as well, with some focusing on the North American or Asian bond market while others focus on bonds from different credit segments (e.g government debt, higher/lower rated issuers).

Historically, bonds are less volatile when compared to equities, but they also deliver lower returns than their equity counterparts, which we will now turn to.

Equity Funds

Equities, or more commonly-known as stocks or shares, are instruments that represent an ownership in a company. When you purchase a stock, you are simply purchasing an ownership stake in a particular company, and you are considered that company’s shareholder. As a shareholder, you get to participate in the future outcome of the company that you invested in – should revenue increase and profits grow, the value of your investment usually increases due to the appreciation of the company’s stock price. Depending on the size of their market capitalisation, companies can be classified either as “large-cap”, “medium-cap” or “small-cap”.

Funds that primarily invest in equity securities are thus known as equity funds. Depending on a fund’s mandate and focus, they would differ in terms of their geographic exposure, market segment or industry. For example, equity funds that invest in smaller-capitalised companies are known as small-cap equity funds, while some equity funds are only invested in specific sectors such as the technology sector.

Since equities represent ownership in the future outcomes of companies, they will be inherently more volatile and riskier than bonds as what a company earns in the future is uncertain given that economic and financial market conditions are ever evolving. Conversely, potential returns from equity investing is also higher as compared to bonds, and equity funds are indeed a great way for long term investors to grow their assets, given that one would essentially have a basket of stocks to greatly reduce the specific risks associated with an individual company through diversification and at a small outlay of capital.

Balanced Funds

Balanced funds invest investors’ monies into both bonds and equities, and usually will maintain an equal proportion to both asset classes, hence the name “balanced.” Balanced funds essentially have a profile that is between the risk profile of a bond fund and an equity fund, with potential returns that are higher than a generic bond fund but lower than that of a generic equity fund. For investors with limited capital desiring to have exposure to both bonds and stocks, purchasing a balanced fund would be ideal, as compared to over-extending themselves and committing capital for 2 funds (1 bond fund and 1 equity fund) in an allocation that does not suit their risk appetite, or, forgoing one asset class and resulting in an unsuitable portfolio.

Additionally, novice investors may not be familiar with asset allocation strategies (deciding how much bonds or equities to own) – purchasing a balanced fund essentially ‘outsources’ this task to the fund manager, rendering them a great one stop solution for the uninitiated or for those with capital constraints.

Alternative Investment Funds

Alternative investment funds tend to be characterised by more complex investment strategies or investments in asset classes beyond the traditional bonds and equities categories. Depending on the underlying instruments utilised or the strategies employed by the managers, alternative investment funds possess diverse underlying risk profiles. Some of them may have exposure to real estate or commodities (resources), while others may use more complex financial derivatives in their investment process. Investors are strongly advised to seek professional advice when considering such products for their portfolios.

To learn more valuable advice on various asset classes, including equities and other beneficial investment products such as mutual funds, bonds and insurance, come and join us at the upcoming largest investment event ever organized by Fundsupermart, FSM INVEST Expo 2016!

FSM INVEST Expo 2016
When: Saturday, 11 June 2016
Time: 10am to 7pm
Venue: Suntec Convention Centre Hall 404 (Level 4)

Register today, and stand to win fabulous prizes at our bi-hourly lucky draw!

Fundsupermart is the online unit trust distribution arm of iFAST Financial Pte Ltd. It carries the Capital Markets Services (CMS) License and Financial Adviser (FA) License issued by the Monetary Authority of Singapore (MAS), and is also an appointed Central Provident Board (CPF) Investment Administrator.

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