investment funds singapore - Singapore

Picking a Mutual Fund: Keep it Simple

Picking a good mutual fund is not as hard as it seems at first glance. That is, of course, if you keep in mind that you are not out to beat the market. Mutual funds are primarily a way of preserving capital against inflation and the ups and downs of the market. Don't go into the process expecting to pick one of the few mutual funds that manage to outperform the market each year. Decide what your personal goals are before beginning to research the vast array of mutual funds out there. Are you out for long-term capital gains? Or are you looking for a reliable source of income? Many mutual funds penalize early withdrawal with sometimes hefty fees. If the fund takes a dive and you pull your money out ahead of schedule, you could be hit with a big fine.  

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Look at withdrawal penalties and payout schedules and compare it with your tolerance for risk and/or need for consistent income.

Mutual Funds' Expense Ratios: Are They Worth It?
Mutual funds are actively managed investments. Somewhere out there a fund manager is making the day to day decisions about what to buy, sell and hold, and that person has to be paid for their time and effort. How much fund managers earn is usually determined as a percentage of portfolio gain, to encourage good performance. The expense ratio of a mutual fund is the percentage of gain that goes to pay the fund manager for his or her effort.

Management fees come with the territory of active investments. These should be the only fees you ever have to pay. Mutual funds that come with sales charges, such as an up-front cost just to buy into the fund, should be avoided. These fees are completely unnecessary: don't buy a mutual fund that charges them.

There are two schools of thought about expense ratios. If you think the underlying asset class is going to appreciate regardless of the skill of its managers, by all means purchase a fund with a low expense ratio (less than 1.0%). Better yet, purchase an index fund tracking a particular sector and avoid management fees altogether. Why pay extra if you think the asset class will appreciate regardless of well it's managed? Paying an expense ratio higher than 1.0% can only really be justified if you expect greater volatility in the years to come, and the fund's managers have a proven track record of weathering uncertainty. That said, expense ratios have been trending down in recent years. The fact is that funds with high management fees rarely do much better than their less expensive counterparts.

Past Performance: Tomorrow is Always a Brand New Day
The most common pitfall when choosing a mutual fund is to look at its track record. It's tempting to buy a mutual fund that has averaged 5% for the last five years, but good past performance is no guarantee of future profits. The most important factor when picking a mutual fund is the underlying asset class. Do you expect the fund's underlying assets to appreciate? Do you trust the fund's managers to hedge against the potential for a downturn? This is where past performance can be instructive. Compare the historical performance of different mutual funds in the same asset class during good times and bad. Which funds weathered the downturn best? Which ones took the hardest hit when the market went sour? This will give you clues about the abilities of the funds' managers, who's on the ball and who's not.