Mutual funds, or unit trusts, as they are more commonly referred to in Singapore, are portfolios of investments actively-managed by a professional fund manager, who invests in a range of asset classes based on the stated objectives of the fund.
The idea is that through active management, you will achieve superior returns that beat the market. This is contrasted by the approach taken by passive funds like Exchange Traded Funds (ETFs) that seek to match the market’s performance.
With active management, there will be winners and losers – funds that do very well, and others that fail to even match the market. The key question is how do you choose from among the hundreds of funds on the market.
Choosing The Right Unit Trust
All fund factsheets would be quick to remind you: Past results are no indication or promise of future performance.
That does not mean that there is no value in examining a fund’s past annual reports and factsheets. If you know where to look and what to look out for, you will be able to understand the factors that contribute to a fund’s returns, the risks you would be taking, and costs you will be incurring.
These will go a long way in helping you decide if the fund is a right fit for your risk appetite, time horizon you wish to be invested in, and you own views of larger economic trends.
#1 Investment Objectives and Parameters
The investment objective outlines the goal of the fund, which could be described in terms of the underlying assets, geographical regions, industrial sectors or themes (like ethical investing). For example, a fund could have the mandate to invest in high growth companies in a certain geographic region, or to ride on specific sectors like technology or healthcare.
The fund manager implements the investment strategy to meet the investment objective and decides what assets to buy or sell. The most common assets that mutual funds invest in are stocks and bonds, but funds do use other investments instruments like financial derivatives, cash or cash-equivalent products, real estate, units in other funds, and even cryptocurrencies.
By examining the fund’s investment objectives and strategy, you can decide if you agree with the fund regarding their investment strategy and assess if you are comfortable with the risks the fund is exposed to.
#2 Net Asset Value (NAV)
A fund’s Net Asset Value (NAV) is the daily market value of the fund’s assets minus expenses and other liabilities. NAV is computed daily to give a most updated snapshot of the value of the investments held by the fund. The price of each unit in a mutual fund is calculated by taking the NAV and dividing by the total number of units .
#3 Total Returns
Total returns take into account both the appreciation in value of investments as well as any dividends or other income received. Returns are annualised, but you should check if the returns provided are net of fees and charges.
#4 Sharpe Ratio
The Sharpe ration measures performance relative to risk taken. In general, the higher the Sharpe ratio, the higher the returns the fund was able to generate relative to the amount of risk taken. Two funds could have given similar returns, but if one of them took significantly greater risk, then it would not be that great of an investment, comparatively.
Beta measures the volatility of a portfolio in comparison to the market as a whole.
Simply put, beta measures how closely the returns of an investment tracks swings in the market. A fund that perfectly tracks the market would have a beta of 1.0. A beta of less than 1.0 indicates that the fund will be less volatile than the market. A beta of more than 1.0 indicates that the fund will be more volatile than the market.
Conservative investors that do not want too much volatility can look at funds with low betas, while investors willing to take on more risk (and potentially higher returns) should look for funds with higher betas.
#6 Total Expense Ratio (TER)
Total Expense Ratio (TER) is the sum of recurrent fees incurred by the fund. As an investor, before you see any returns enjoyed by the fund, the expenses will need to be taken into account. It is possible that a fund’s returns are lower than its expenses, which means your investment depreciated in value. Typically, funds with larger asset bases tend to have a lower TER.
Here are some of the common charges that funds levy on you, the investor.
Subscription fee or initial sales charge (“front-end load”): The fees payable when you buy a fund, typically ranging between 1% – 5% of your investment amount. Funds that charge a front-end load usually would not charge a back-end load, and vice-versa.
Redemption fee or realisation charge (“back-end load”): Payable whenever you sell or redeem the fund. It usually ranges between 1% – 5% of your investment. Some funds progressively reduce the redemption fee if you hold your investment over a longer period of time.
Switching fee: Payable when you switch from one fund to another fund managed by the same fund manager.
Management fee: An annual fee charged by the fund manager for managing the fund. It is usually about 0.5% – 2% of the fund’s NAV.