4 types of funds Singaporean investors should know about

You want to put your money to work in the financial markets to receive a higher return. However, you may be unsure on what you should invest in, or what to even look out for in the various types of investments out there.

If you prefer to have a professional fund manager who makes the right investment calls on your behalf, which are backed by research, knowledge and years of experience, then unit trusts (also known as mutual funds) may be the right place to start.

This sounds like a good plan until you are given a list of unit trusts that you can choose to invest in.

Before you decide, here is some basic information on the types of funds available, and what you need to think about before you invest in them.

#1 Equity

Equity funds mainly invest into publicly-listed businesses that are commonly referred to as equities, stocks or shares. These types of funds can also invest into equity-linked securities such as indexes and, sometimes, even more complex derivatives.

Fund managers will typically spend time researching and understanding individual businesses and the broad market to search for opportunities to invest in companies that they believe would generate the best returns to meet their clients’ objectives.

Some funds will track themselves against a benchmark index. This benchmark index gives investors a good gauge on whether fund managers are delivering greater value over the long term, or whether investors are better off investing in the market index itself through other means such as an exchange-traded fund (ETF) or on their own once they build sufficient knowledge and understanding.

#2 Fixed Income

Fixed income funds aim to generate returns through investments in debt instruments, more popularly known as bonds. Such bonds could include sovereign bonds, high quality corporate bonds, lower grade bonds or junk bonds.

For both bonds and stock investing, fund managers are actively working to find the best companies to invest. However, managing a portfolio of bonds is fundamentally very different from stock investing.

When it comes to investing in bonds, fund managers need to strike the right balance between the maturity and achieving higher interest returns. That’s because bonds that have shorter maturity tend to be safer but also provide lower returns compared to a similar bond issued by the same company with a longer maturity. In addition, fund managers also need to manage currency risk since different bonds within their portfolio would typically be issued in different currencies.

Do note there are funds that invest in both equity and fixed income. These funds are typically known as multi-asset funds. There are also funds that invest in other asset classes such as alternative investments, commodity, real estate and others.

Consumer & Retail

With more trade expected to occur and better connectivity to establish new trade, traditionally poor regions in the BRI should begin to prosper. Poverty in many of these countries should reduce as the trickle-down effect spreads to benefit people throughout the region.

A simple way of looking at a boom in consumerism comes from the increased demand for labour. Using the construction sector as an example, infrastructure still heavily depends on human labour in the entire construction phase. This should create jobs for a large pocket of the economy.

More advanced jobs in banking and finance will also be created as the region increases its intensity in trade that generally requires payment and financing intermediaries. With stronger trade outlook, lower unemployment and more money being spent, consumerism is expected to grow at a faster pace as well.

Some of the major areas of spending will likely come from consumer staples as more people have access to it. Consumer discretionary spending would also be bolstered as people gradually become more affluent.

#3 Geographical Sectors

The investment world we live in is huge and fragmented, many funds would concentrate their research efforts and investment in a designated region. This also allows investors to focus their investments, as well as best leverage on a fund manager’s expertise in a particular region.

Funds that have a focus on certain geographical regions can invest in any of the asset class - equity, fixed income or multi-asset. Common and popular regions would include the following:
• U.S
• UK
• Europe
• Emerging Europe
• Asia (excluding Japan)
• Japan
• BRIC (Brazil, Russia, India, China)
• Global

These broad geographical regions provide a broad selection of companies for fund managers to invest in. At the same time, it allows for diversification, as investments made within the fund would come from multiple countries, instead of just concentrating on one or two places, which could be particularly risky for certain emerging markets.

#4 Industry Sector Funds

There are also funds that invest only in certain industry sectors. These can include energy and resources, finance, healthcare, infrastructure, lifestyle, real estate, technology, telecommunications and many more.

For such funds, investors need to be familiar about the sector and the reasons behind why they want to invest in it. Compared to other funds with a wider focus, such sector specific funds tend to have more unsystematic risks that investors would need to bear, which is also a form of uncertainty that comes with the specific sector you invest in.

Invest in an area that you are familiar with

Just because you are investing into a unit trust does not mean you should take a completely hands-off approach towards your investments. There are different types of unit trusts that you can consider investing into, .so it is important that you decide which is right for you.

Since you are investing through a unit trust, you do not need to worry about the specific companies to invest in. However, you do need to ask yourself what are the sectors, regions and types of investments (equities, fixed income, or multi-asset) you want to go into.

To do this, you can leverage on dollarDEX’s Fund Finder to help you determine suitable unit trusts that are in line with your investment objective. It allows you to select funds from specific geographic regions, industry sectors and asset classes as well as break down funds by its investment managers and whether you can use your monies in your CPF (Central Provident Fund) or SRS (Supplementary Retirement Scheme) accounts to invest in them.

Once you’ve narrowed it down to your liking, you can read through the factsheet and reports of the particular fund, then simply sign up to start investing!.