Fund 101: A Beginner's Guide

Thinking about how to start investing? Funds can be a good start! Put simply, a fund is like a big money jar that pools money from lots of people and lets a professional fund manager invest it in assets like stocks and bonds. Even if you're a beginner with a small amount of money, it's a way to own a piece of many different assets and spread your risk.

It’s important to keep in mind that funds don't guarantee your capital, and their value can go up or down. Before you begin, it's good to think about your investment goals, period and how much risk you're comfortable with. This will make choosing a fund much clearer!^[1]

• They're managed by a pro: You don't have to watch the market every day. A fund manager and their team do the heavy lifting. They decide what to buy and sell based on the fund's goals and what the market is doing, all to manage risk and aim for returns.

• Your money is kept safely and separately: Your investment is held by a third-party "custodian bank," completely separate from the fund company's own money. The fund company only makes the investment decisions. This keeps your capital safe, though the fund's value will still move with the market.

• You can see if you're making or losing money from the NAV: Net asset value (NAV) is like the fund's "market price. When the fund's investments go up in value, the NAV rises, and so does the value of your investment. It's usually updated daily, so it’s very transparent.

Funds come in many types, with different risks and returns. Here are a few common ones to give you an idea:

This is a question many beginners ask!

• Diversification: A single fund investment can hold dozens — even hundreds — of securities at once, so 1 company's stumble won't drag down your whole portfolio. That said, diversification can reduce concentration risk, but it can't shield you from a broad market decline.

• Professional management: Fund managers and their analyst teams handle the research, trading and portfolio adjustments, making funds a natural fit for beginners who don't have the time to dig into individual stocks.

• Global access: Pooled capital opens up access to overseas equities, bonds and real estate investment trusts at a far lower entry threshold than going direct. A monthly investment plan lets you build that exposure gradually over time.

Fund fees can definitely eat into how much you make in the end. Here are the common ones to watch out for:

The higher the fees, the lower your actual returns will be. Imagine 2 funds both earning 6% a year. If one charges a 1% annual fee and the other charges 2%, that difference can really add up over a long time thanks to compounding.

• Complete a risk assessment first: Find out where you sit on the risk spectrum — from conservative to aggressive — and use that as your starting filter for suitable products. As a beginner, it's best to stay within your assessed risk level rather than reaching for higher-risk funds. Whenever your financial circumstances change, revisit and update your assessment.

• Review performance across different cycles: Look at how a fund has performed through bull markets, bear markets and flat periods alike, and compare it against a relevant benchmark index. Always keep this in mind: past performance isn't indicative of future results.

• Check the target allocation: Read the offering documents and confirm that the fund's target regions, asset mix and investment objectives genuinely match what you're trying to achieve.

• Set a review schedule: Schedule a portfolio check-in every quarter or half-year, and resist the urge to trade on every short-term market movement.

Most fund platforms keep entry thresholds accessible. "SimplyFund", for instance, lets you start investing with as little as HKD1 — making it one of the most beginner-friendly entry points available.

• Active funds may not outperform the index: When comparing active funds, weigh up the investment strategy, fees and performance relative to the benchmark, not just the headline return figure. Past performance is no guarantee of what comes next.^[2]

• Cash drag effect: Because funds hold a portion of assets in cash to meet redemptions, they may not fully capture the upside during a rising market.

• Principal risk can't be eliminated: Diversification lowers concentration risk but it doesn't make you loss-proof. A fund's value can still go up or down.

Looking to build a more comprehensive fund portfolio? Hang Seng Prestige Banking gives you access to dedicated relationship managers and a 24-hour wealth management service team. Drawing on your investment objectives, risk tolerance and prevailing market conditions, they can help you shortlist the right funds, build a personalised investment strategy and identify the best overall management solution for you.