Manage My Money is a mini series looking at ways in which to save and budget to achieve your goals. Through investing in an Emergency Fund and Unit Trust we hope to securely manage money.
Understanding what Unit Trusts are made up of and volatility they have can give you an idea of which ones suit your goals.
Looking at a Unit Trust fund fact sheet allows you to see key details which can help narrow down your choices. This is not an easy process and it is extremely risky to try do this on you own. If you are considering investment options you need to consider getting financial advice.
What am I investing in?
As financial planners, we are here to help you invest your money into the right funds.
By understanding your financial goals we can guide you, but it helps if you understand some of the basics.
In our previous article we looked at the different asset classes of investments. In this article we are going to start looking at the performance of funds and how to make sense of the fund fact sheets.
What is a Fund Fact Sheet?
A fact fund sheet is a document which provides insight into the investment objective.
The top 5-10 holdings and the composition of the asset classes can give you an idea of how risky the fund is.
You can also get a clearer picture on the size of companies, sector, or geography the fund focuses on.
Looking at fund fact sheets gives you insight into whether the unit trust is best suited for your goals.
A fund fact sheet usually shows the top 10 holdings, some risk measurements, performance and the asset allocation. Asset allocation is the composition of the fund which comprises of equity, property, cash or bonds.
Performance
Rather than just a single investment in a certain asset class, it is recommended to have a portfolio.
A portfolio is a collection of funds and asset classes such as equity, property, bonds and/or cash.
Having a portfolio allows for diversification. The purpose of diversification is for good capital growth and is essential for spreading your risk so that the performance of your portfolio is not completely vulnerable to one asset class.
A very famous saying and for good reason is the idiom “Don’t put all your eggs into one basket.”
If one sector (property for example) is performing poorly, you are still getting returns from the other sectors.
The weighting of these assets will determine your risk and your return. Warren Buffet and many other successful investors swear by diversification and asset allocation being amongst the most important things to investment success.
Why is the Performance of a Fund Important?
The performance is not always measured by the highest return. It is also about risk, volatility and performing according to their plan and promise. The higher the risk, the more return you would want as an investor.
For the performance of the fund to make sense, you need to compare oranges with oranges. That is why we should be comparing against the benchmark in the asset class. The S&P 500 Index, Nasdaq Index, MSCI World Equity Index are examples of some commonly used benchmarks.
You can also look at how the fund performs in comparison to its peers across certain time periods.
Fees
Fees are another important factor to take into consideration as they can affect the overall performance of the fund.
A very high fee structure could be damaging to your return in the long term.
A very low fee structure is generally better but it is certainly not the only factor to consider when choosing a fund.
Finding the correct balance between affordability and performance is key when looking at fees.
Risk Factors
You need to take note of the fund drawdowns and other risk measurements
These measurements show historical levels of risk the fund has experienced.
You want to be invested in funds where the risk measurements match your goals and timeline. High-risk funds will fluctuate more than low risk.
The lower the percentage of the risk measurements like drawdown, the more likely the fund is to be stable.
Local and Offshore Exposure
Knowing how much of the Unit Trust is exposed to offshore markets can help you weigh up your market exposure.
Having a high percentage of offshore means that you will benefit from companies performing well internationally irrespective of how the local markets are doing.
Having a good balance between offshore and local funds is important to diversification and can make the world of difference.
Asset Weighting
Having the correct weighting of assets, (equities to conservative assets) can allow you to reach your investment goal.
Unit trusts with a higher weighting on equities and properties are considered more aggressive. These assets classes are ideal for long term investments as they are likely to provide the best return over long periods.
Unit trusts with a high weighting on bonds and cash are conservative and are ideal for short term investing.
Locating these 5 facts on a Unit Trust fact sheet can help with finding the right Unit Trust for you.
Remember that diversifying your portfolio by investing in multiple Unit Trusts can be very beneficial in reaching your goals.
It is important to do research on a fund before investing in it. Working with a financial planner removes a lot of the guess work and will bring direction and objectivity.
You can now ask the right questions when speaking a financial planner and hopefully getting even more value from them next time you meet.
FAQ's
1. What is a Fund Fact Sheet?
It is a basic yet complicate document outlining a risk assessment, historical performance, fees and asset allocation.
2. What is a Portfolio?
An investment portfolio is a collection of unit trusts, shares and/or funds. A well balance portfolio should include all asset classes (shares, bonds, Property, cash etc.) The type of portfolio is determined by the weighting of these classes.
3. Should I Invest in a High Risk Unit Trust fund?
The answer to this question is completely dependent on your needs and goals. You need to take into account several factors some of which are your time frame, required return and reason for investing.
