Choosing a fund

Investing in unit trusts is one of the many instruments that one can venture with their capital. Unit trusts allow you to invest in a region or a type of asset which you can’t easily access as an individual investor. For example, you may find it impossible to buy Korea stocks but it is possible for you to invest in a Korea equity fund.

One of the important steps in making an investment plan is fund selection. Assuming you have already done an investment goal, know your risk appetite and decided on the right asset allocation, the next step is to choose the right funds before executing that plan. First you can read more on how to make an investment plan from sgfunds, but in this article I am going to share what are the points that you need to look out for when choosing a fund.

One of the most important criteria when choosing a fund is its annual expense ratio. An expense ratio includes management fees and other charges which you need to pay to the fund manager. A typical annual expense ratio can range from 1% to 2.5% for an equity fund. It is advisable to choose a fund that has a low expense ratio so as as to maximise returns. When you invest in a fund, the expense ratio is computed daily and automatically deducted from the Net Asset Value (NAV) or price of your fund.

Besides expense ratio, Sales Charge (SC) is also an important criterion when choosing a fund. Most of the funds sold in Singapore are front-end loaded type. That means you need to pay a certain fee in terms of % to the fund house or distributor if you want to invest in that fund. Choose a fund that has lower SC so that you have more capital to be invested earlier.

A typical SC for most equity funds can range from 1% to 2% if you buy from online fund houses like Fundsupermart, POEMS or Dollardex. Take note that if you are a long term investor, you are better off choosing a fund with high SC and low expense ratio than choosing a fund with low SC and high expense ratio. Switching charges should also affect your decision when buying funds.
After looking at the fees, you should then see the fund size. A fund which has a smaller size may pose the fund manager a difficult task to do proper diversification or allocation. A smaller fund may also faces the risk of an early termination. Therefore choose a fund which has a big fund size.

You always hear that past performance do not guarantee future performance. Even though this statement is true but it should not deter you from choosing a fund which has a good track record. For example with all things being equal and you are asked to choose between a new fund and an older fund which has been performing well, which fund would you choose? Obviously you would choose the latter. So choose a fund that performs well historically or as good as its benchmark.

You might also want to take a look at the fund top ten holdings or country and asset allocation from the fund fact sheet. Make sure you are comfortable with the allocation made by the fund manager before investing into it.

You can also check the management style adopted by the fund manager. For example, Lion City fund managers adopt growth investing while Aberdeen fund managers adopt value investing. Choose a style that you are comfortable with.

The final criteria and the least important points you should look out for are its minimum subsequent investment, minimum redemption amount and minimum holding. These minimum amounts will affect your future decisions when making rebalancing, redemption or switching of the funds. For example, if the minimum holding amount is big, it is difficult for you to take profit if your invested capital is small.

The above are some of the important points you should consider before putting your capital in unit trusts with costs being the most important factor.