3 reasons why stocks and ETFs are NOT the only ways to start investing
6 April 2021
Experts advocate diversification as a way of enhancing portfolio's returns, while reducing its risk.1 That is why when it comes to growing your money, it is important to have a diversified portfolio as one of the most basic strategy to weather all kinds of crisis and volatility, especially in today’s uncertain world.
If you are investing for the long-term, you should look at your portfolio and see how you can complement it with other investment products as part of your truly diversified portfolio, which is why, to contrary belief, stocks and ETFs are definitely not the only place to start investing.
Do you know the key differences between some of the popular investment options below?
Index funds - lower cost than ETFs?
To help you digest the different options better, here are some scenarios where an index fund (also known as index unit trusts) may be a better option than an ETF and debunk the myth that ETFs are the only option to start investing.
You can look for an index fund that has lower annual operating expenses than a comparable ETF. Simply put, don’t assume ETFs are always going to be the lowest-cost option. Look around further and do some homework before settling on a particular investment option. On dollarDEX, we have index funds that can suit different investment needs with lower management fee of 0.4% and is suitable for those who are more cost conscious.5
Read more: Warren Buffett says Index Funds are one of the best investments, what do you think?
The ETF could also be thinly traded where you may have to consider the size of the bid-ask spread of a low-volume ETF before purchasing it.5 In the case of a thinly traded ETF, it can lead to wider spreads which means, the trading cost can be higher.6
Equity funds – bridge between you and stocks?
Some investors may short list only low-cost options when it comes to creating their investment portfolio. Some may dive straight into stocks and start dabbling with it. While it may be exciting to have an interesting play with stocks for your long-term goals, that does not mean you have to buy and trade individual stocks — you can also gain that exposure through equity funds, also known as equity unit trusts.
These equity funds are like a middleman between you and stocks where they pool investors’ money and invest it in different companies. Investors are investing into various stocks in a single trade through a mutual fund or UT instead of spending time to pick individual stocks, which can be a great way for beginners who do not know much about the stock market yet want to gain exposure to it.7 This also provides access to various investment opportunities or certain markets that you would not have been able to access in your individual capacity.
Investing in equity funds also makes more economical sense. For instance, an investor who invests into an equity fund on a zero-fee platform such as dollarDEX, the minimum investment amount is only $1,000 to start and you will gain easy diversification and exposure to different markets as compared to investing more into one individual stock.
Actively-managed funds – still worth it?
Consider an actively managed fund if you want a fund that can outperform the market and beat the benchmark, without the potential higher risk that may come from investing in an individual stock. Additionally, active management with a specific strategy may complement index funds in a portfolio. For example, some managers aim to reduce downside risk and volatility.5
Another reason to consider an actively managed fund is when you are investing in a less efficient part of the market. Emerging market stocks or high-yield bonds are less efficient markets where deep research and a proven strategy could pay off, and this is where the role of an active fund manager comes in.5
A very common perception that people have on actively managed investments is that it is expensive because of the management fees. It is true that actively managed investments tend to have higher fees but there are good reasons why. Regardless of your investment amount, a professional fund manager monitors your investment and makes strategic decisions to help achieve the fund's objectives. A fund manager of a unit trust also evaluates market conditions and perform various actions to help you maximise returns, comparing to investing in individual stocks, you don’t have to actively monitor the performance on your own. On top of that, investing into a unit trust allows you to further diversify your portfolio as a unit trust invests into a basket of different stocks. Don’t you now think that actively managed funds are not that expensive after all?
Read more: Are fund managers worth all that fees? Despite the differences between the various investment options, there are also striking similarities between UTs and ETFs as they both offer great diversification. They are also generally less risky than stocks or other investment options, but that is not to say that it is risk-free and it is still important for investors to do the necessary research and consider their risk appetite or investment objectives.
There is no one size fits all solution as each of them fills a different need. Therefore, it is important that you diversify and complement the different options in your portfolio as you accumulate your wealth. For new investors who wish to keep their costs low while learning about the market, they can start building their portfolio with index funds on a zero-fee platform like dollarDEX or start a regular savings plan to invest smaller amounts of money over a period of time and take advantage of the effects of dollar-cost averaging.
With close to 1,000 unit trusts to choose from on dollarDEX, there will be a fund that suits your investment needs and objectives and you can easily search for the right one for yourself by filtering with our intuitive fund finder. As a DIY platform, you are also in complete control of your investment, just like you are managing it for your ETF or stock investments.
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