When it comes to investing, mutual funds are one of the most popular choices for investors. Mutual funds allow you to pool your money with other investors and invest in a variety of different assets, such as stocks, bonds and money market instruments.
Mutual funds are one of the best investment tools to use to achieve your financial goals. The number of options available for Singaporeans can seem daunting at first. Still, once broken down into their specific type, it is easier for investors to determine which fund will fit into their portfolio sufficiently.
Types of mutual funds
There are three main types of mutual funds in Singapore: equity funds, fixed-income funds and balanced funds. Each type has sub-categories that cater to different kinds of individual investor preferences.
Close-ended vs open-ended funds
Closed-end mutual fund units must be sold on an exchange like stocks, while open-ended units can be created or redeemed by the fund company depending on demand. Equity funds are simply funds that invest in stocks.
There are two types of equity funds: growth and value. Growth funds are focused on finding companies with high potential earnings growth, while value funds look for stocks that are trading at a discount to their intrinsic value. In Singapore, there is a significant focus on technology and healthcare stocks, so that most equity funds will have a bias in these areas.
Fixed income funds
Fixed income funds are exactly what they sound like: funds that invest in fixed income securities such as bonds and treasury bills. The key difference between fixed income and other asset classes is the level of risk involved.
With bonds, for example, the issuer (the company or government that borrows money) is obligated to make periodic interest payments and repay the principal amount of the bond at maturity. This makes bonds a more stable investment than stocks, which means they offer lower returns and less risk.
Balanced funds are a mix of equity and fixed income securities and are usually divided equally between the two. They are a popular choice for investors who want the security of a fixed income fund with some exposure to equities. Because balanced funds have a higher level of risk than fixed-income funds, they usually offer a higher return potential.
Benefits offered by mutual funds
Mutual funds offer investors several benefits, including convenience, diversification and professional management.
Convenience is one of the main benefits of investing in mutual funds. With just a small amount of money, investors can buy into a mutual fund and access a professionally managed portfolio.
Additionally, many mutual funds allow investors to reinvest their dividends which can help compound returns over time. Investing in mutual funds can help diversify an investor’s portfolio.
The fund manager manages the securities held in a mutual fund, and they decide on which individual securities to purchase or sell. If one security underperforms, it will not affect the entire portfolio since other securities may be performing well. This can help reduce an investor’s overall risk exposure.
Capital gains taxes
Mutual funds allow investors to defer capital gains taxes on their investments until they decide to sell their units for cash on hand. There is no tax payable on dividends earned from stocks held within a mutual fund since dividends are automatically reinvested into the unit trust without taxation. When an investor eventually sells his units for cash, he will only be taxed on the capital gain.
Within each type of mutual fund, there are dozens of different options to choose from. Investors need to do their research before selecting a fund, as each one has its specific investment objectives, risk profile and fee structure.
By understanding the different types of mutual funds available in Singapore, investors can make more informed choices about their investments and ultimately achieve their financial goals. New investors should contact reputable online brokers from Saxo Bank before starting their investment journey.