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Clarify your doubts before investment

Four major misunderstandings about investment funds

  • Monthly plan is not the only option for investment funds. In fact, there are mainly two types of investment funds. Besides Monthly Investment Plan (MIP), Lump Sum investment is another option
  • Investment funds are not limited to premium investors and it costs less to start than you may think. Investment funds pool capital from a group of investors, and their investment threshold is usually not high. Investors from the mass public, with a relatively small amount of money, can invest in various assets at the same time through capital aggregation
  • It is not a must to wait for a long period of time before selling the investment funds. Some rookie investors tend to have a misunderstanding that they can only sell the fund after a long period of time or they will be penalised. Although investment funds should be considered a medium to long-term investment, there is no penalty when the investors sell their investment funds. Investors should always make their investment decisions based on their own circumstances
  • No need to worry about hidden charges. All fees and charges of a fund product will be clearly and explicitly listed out in the “offering documents”. In general, fund houses and distributors may charge investors subscription fee, redemption fee and management fee, of which the percentage will be stated in the “offering documents”

Funds and Investment-linked Assurance Schemes (ILAS)

  • Investment horizon: It is quite flexible to buy and sell funds. One can either invest with a lump sum or choose a monthly plan, while making redemptions on any dealing day. On the other hand, under ILAS, participants can receive the death benefit or returns after the life insured dies or a certain investment horizon (usually 5 to 20 years)
  • Investment objective: Fund investment and ILAS have different goals. While the former mainly aims at capital appreciation or a certain level of protection against inflation, the latter focuses more on the long-term planning of assets and estate
  • Investment return: The return of a fund investment is quite straightforward as it is directly linked to the fund’s performance. As for the ILAS, the return is calculated by the insurance company pursuant to the policy provisions, taking into account the death benefit, which may not completely match with the performance of the selected funds in the insurance policy
  • Charges: In a fund product, fees and charges, together with their proportions, will be listed in the prospectus, including the initial charge, management fees, redemption charge, etc. In an ILAS product, in addition to what charged in the underlying funds, other fees and charges related to the insurance policy may also be included

Equity funds and stocks

  • Risk diversification: An average stock investor may only own one or a few stocks. On the contrary, investment in a fund is investing in a portfolio of stocks in various countries or industries, which can effectively reduce risk through diversification
  • Selectivity ability: Picking stocks on one’s own meaning one can freely adjust the stock holdings following their own preference and circumstances. Funds are managed by professionals who, after analysis, will choose stocks and adjust the portfolios based on market trends and economic conditions or track specific broad market indexes.   
  • Switching investments: Stocks can be sold and bought at any time, so can funds. Investors can buy and redeem funds at each dealing day
  • Investment cost: For the average investor, putting together a portfolio of stocks to diversify risk could be costly. With aggregated capital from a group of investors, funds invest in diversified assets. This allows the average investor to hold a basket of stocks through the fund with relatively small amounts of money

Fully understand content and risks involved during investment

Making small investments in a big world

  • In the world of fund investment, there are a wide variety of sectors available. By industry, stocks can be categorised into healthcare, technology and property, etc. Bonds can be divided into sovereign bonds and corporate bonds. The portfolio of regions can also be formed in many ways, including the Greater China market, which is familiar to many, developed markets such as Europe and the United States, as well as emerging markets like India, Vietnam, Indonesia and Latin America
  • For an ordinary investor, “world-class” investments like bonds and crude oil seem beyond reach, but by investing in investment funds, these will all be at your fingertips
  • The benefits of diversified asset allocation lie not only in potential capital appreciation, but also in how it can effectively spread out risk
  • Theoretically, in an economic expansion, stocks and commodities may be able to generate desired returns. On the other hand, in an economic slowdown, sovereign bonds of developed markets may retain in value. Also, while emerging markets often seem to have a higher potential for growth than developed markets, they face higher risks
  • If investors can allocate investments among various geographies and asset classes, then they will be able to reduce the risk of investing in a single market and enjoy the returns of multiple asset classes in different economic cycles
  • With the fund manager’s professional analysis and asset allocation strategy, investors will be exposed to investment opportunities across the world. Even those with less budget can also seize global investment opportunities
  • The entry threshold for most investment funds platforms is not high. For example, the entry threshold of “SimplyFund” is as low as HKD 1

Not knowing is the biggest risk

  • The risk tolerance level of each individual varies, and so do the potential risks of different types of products. Therefore, it is best to conduct a thorough risk assessment before making any investment
  • The risk tolerance level of an individual can be generally measured on a scale of 1 to 5, with 1 indicating a conservative investor and 5 meaning a very aggressive one. If you want to understand your risk profile and investment needs, you can log on to Personal e-Banking and complete the Risk Profiling Questionnaire to assess your risk tolerance level. You will then have a reference of how much risk you would like to take when making investment decisions
  • Risk levels of funds: Level 1 being the lowest risk and level 5 being the riskiest
  • An investor with a relatively lower level of risk tolerance may not be able to take the instability of the investment return and the asset’s price. They tend to make irrational investment choices due to market fluctuations and thus incur losses
  • For an investor with a higher risk tolerance level, a more aggressive investment profile and is able to bear bigger loss, if he/she acts too conservatively and only focuses on low-risk investment products like bonds and money market funds, it is also not likely for them to achieve desired returns
  • Generally speaking, the higher the potential reward of an investment, the higher the risk. On the contrary, an investment with lower risk will have a smaller potential return
  • However, there is no good or bad between high and low investment risks. The only thing you need to consider is whether an investment suits your financial goal and risk tolerance level
  • The risk tolerance level will change, depending on factors like financial goals, age, and investment experience. Therefore, investors need to update relevant information regularly to provide references before investing
  • In addition to evaluating your own risk tolerance level before making any investment, investors should also conduct the ‘Investor Protection Assessment’, to know whether you will be assessed as a “vulnerable customer” to have our additional protection measures

Beginners’ guide for laissez-faire investors

  • Equities, foreign exchanges, bonds and commodities are all investment options. However, there is a lot to know when it comes to which stock to pick, what kind of currency to buy, and which sovereign bond is the least risky. In this case, why not take a glance at some laissez-faire features of investment funds
  • Feature 1, professional management. Each fund is managed by a professional fund manager. Based on different market conditions with their fundamental and technical analysis, a fund manager and his/her team will align with the investment goals and try to select investments with higher potential. They will also adjust the investment portfolio according to economic and market trends, in order to manage the risks and in an attempt to generate returns
  • Feature 2, diversification. The conventional wisdom has taught us not to put all our eggs in one basket. Compared with direct subscription of assets like single equity and foreign currency, investment funds may be better at risk diversification. For example, an equity fund can invest in a bunch of stocks of different sectors and backgrounds at the same time. Even when one stock or stocks of a certain category are affected by political, economic or market factors, the investment funds may still offset the losses with profits gained from other stocks. In addition, some funds are even able to do cross-border investments to diversify risks across different geographic regions
  • Feature 3, global investment. It is comparatively difficult for general investors to invest directly in overseas assets, such as bonds issued by foreign governments, foreign stock markets, and commodities like oil and precious metals. By buying the fund that hold such assets, you are in a way engaging in global investment
  • Feature 4, flexibility. Investors can buy or sell investment funds on any dealing day though different platforms and channels

Cannot be missed: Four points on choosing the right fund

  • If one wants to know whether a fund is suitable for him/her, the first thing they need to do is to understand their risk tolerance level and also the risk level of the  fund. Risk tolerance level is your attitude towards the risk of loss in investment value. By logging on Personal e-Banking and completing the Risk Profiling Questionnaire to assess your risk tolerance level, you have a reference of how much risk you would like to take when making investment decisions. The assessment is graded from conservative to aggressive. After all, you may take the results as a reference to identify suitable investment funds
  • Second, we need to evaluate the fund performance. The performance and return of different funds may vary greatly as it depends on the fund manager’s ability in investment allocation and decision-making. You may take the past performance of the fund as reference, for example, its performance in different market scenario and relative performance compared with funds of same type, etc. However, please be reminded past performance is not indicative of future performance
  • Third, we need to know the funds’ objective and their asset allocation. In general, investment funds can be divided into several types, namely equity funds, bond funds, and balanced funds. Theoretically, equity funds carry the highest potential returns and also the highest risks. Bond funds are the most conservative ones, while balanced funds have relatively balanced the return and risk. These are just some of the fundamental principles so the exact situation will need to be viewed case by case, you should read the Offering Documents of the corresponding fund to understand its objective. Generally,  assets vary in different economic circles. For instance, equity funds may effectively help with capital appreciation in a bullish market, while bond funds or balanced funds may be more defensive in a volatile market
  • Forth, we need to consider the relevant fees. If two funds have similar performances, their relevant fees may affect your return of the funds. You may take reference with the fees and charges of a fund listed out in the offering documents and the fees charged by your platform to calculate the costs

Closely monitor market conditions and portfolio after investment

Opportunities in times of crisis in a falling market

  • If the fund’s price drops in a down market, it means that more units can be bought with the same amount.  If the related fund rebounds or its price goes up, buying more units at a lower price may lead to greater returns. Of course, if the fundamentals of the market or the fund deteriorate, and the fund price keeps falling, taking the above actions may result in losses
  • In times of a down market or economic downturn, enhancing risk management is a must, an example is incorporating more defensive assets in your portfolios. Generally, compared with global stock market, global bond market is less volatile and more stable in return, and high-grade bonds are considered to be more defensive among bonds
  • Another way to diversify risks is to build a complementary portfolio by investing in asset classes with low correlation
  • No matter how you manage your portfolio, before making any decisions, you should always understand the investment objectives of the fund and whether it suits your level of risk tolerance before making any decisions
  • You should be careful to avoid blindly “buying low”. If your expectation for the fund is bearish, you should make moves to cut loss or switch to other funds or asset classes

How to calculate fund performance

  • The return of an “Acc” (Accumulation) unit class is calculated based on the principle of Price-to-Price of the relevant fund, with reinvestment of all dividends (if any). All fund charges have been taken and the fund management fee is often indicated in the price of the fund
  • There are 3 common terms to show fund performance: Cumulative Return is the aggregate performance from a fund over a set time period based on the date of latest available fund price, for instance, the return generated 6 months ago; Annualised Return converts Cumulative Return into an annualised form based on the fund’s investment period and compound interest effect. As for Calendar Year Return, it simply refers to the performance of a fund in a specific calendar year. For example, supposing the price of fund A on January 1, 2019 was HKD 10, and increased to HKD15 on December 31, 2019, then its Calendar Year Return should be (HKD15-HKD10)/HKD10 x 100%=50%
  • Fund trading is associated with several fees, including subscription fee, redemption fee, monthly fee, administrative and management fee. Theoretically, investors need to deduct all relevant expenses from the fund return before knowing the actual return. Different fund platforms have different charging models. Take SimplyFund as an example, the displayed fund price already reflected the administrative and management fees. Since SimplyFund does not charge subscription fees and redemption fees, you can simply deduct the monthly fee to get their net return
  • In addition to the Acc funds mentioned above, there is another type of fund called Dis (Distribution) Fund, which pays dividends regularly. Different funds have different dividend policies, such as paying monthly, quarterly or annually. The dividend payout ratio and amount also vary. Paying high dividends does not equal to high return. If a fund pays dividend of 10% but losses 10% in its price, then the return is still zero. In addition, dividends may not be guaranteed and can be paid out of capital, which is the investment principal of the fund. This will not only lead to the decrease of a fund’s price, but also reduces a fund’s investable amount
  • You should read the Dividend Composition Information of the fund to be aware of the source of dividend payment. Keep in mind that past performance is not indicative of future results. The fund’s dividend yield showed on the investment platform is based on the dividends record in the past. It does not guarantee the same level of dividend payout 

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Risk Profiling Questionnaire

  • Take a few moments to evaluate your Risk Tolerance Level
  • Understand your risk profile and investment needs
  • Serves as a reference for you when making your own investment decisions
Investment involves risks.


Other point(s) to note

All investments involve risks (including the possibility of loss of the capital invested). Prices of securities and investment products may go up as well as down and may even become valueless. Past performance information presented is not indicative of future performance. The risk disclosure statements and the offering documents of the relevant securities and investment products should be read in detail before making any investment decision.