This post was written in collaboration with FUTU Singapore (FUTU SG). While we are financially compensated by them, we nonetheless strive to maintain our editorial integrity and review products with the same objective lens. We are committed to providing the best information in order for you to make personal financial decisions with confidence. You can view our Editorial Guidelines here.
Ever pooled your money together with a group of friends in order to rent a room at Marina Bay Sands or open a VIP room at a KTV lounge? Then you’ve already seen first-hand how joining forces can be beneficial.
The same principle applies with mutual funds, also known as unit trusts. The idea is that by pooling your money with other investors’, you can benefit from a more diversified portfolio than if you were to do it alone.
Like any other investment, mutual funds can be one way to grow your money, helping you to reach your financial goals faster than simply saving up cash. That means you can retire early, build your wealth or maximise your savings faster!
On the other hand, some potential downsides of mutual funds could be high fees and mis-management — so make sure you choose reputable fund houses and buy via a regulated trading platform.
How do mutual funds work?
A mutual fund is a kind of investment vehicle with the aim to grow your money — but remember, all investments come with risks, no matter how minimal. The fund is made up of money pooled from many investors, and when you invest in it your money is added to the pool.
With a big pool of money, this enables the mutual fund manager to invest in a diversified portfolio of assets, be they stocks, bonds or other types, on investors’ behalf. If you were to do this by yourself, you’d have to shell out a pretty penny to buy all those assets individually, and managing them by yourself would be very time-consuming.
For investors, it is thus easier to simply invest in a mutual fund than to manually put together a diversified portfolio by picking assets individually. You also benefit from having your investments managed by professional fund managers.
What types of mutual funds can you buy?
Mutual funds are subdivided into different categories based on the kinds of securities in their portfolios. They can also be categorised according to the types of returns they seek, the type of investor they are targeted at or the investment approach.
Here are some key types of mutual funds to know about:
- Money market funds — Invests in highly liquid assets like cash and shot-term debt instruments like bonds. Generally considered short-term and low-risk.
- Fixed income or debt mutual funds — Invests mostly in fixed income instruments like bonds and government securities. Generally considered low risk and suitable for those looking for passive income.
- Equity or stock funds — Mainly invests in stocks. Risk and growth potential varies, and the fund may or may not pay dividends depending on the portfolio.
- Target date funds — Geared towards producing maximum returns within a specific time-frame. Suitable for investors who have a target date in mind, such as a retirement date.
- Balanced funds — Using a combination of equities and fixed income instruments, these funds try to balance risk with returns.
- Index funds — Tracks the performance of an index such as S&P’s 500 Index or the Straits Times Index.
These are not the only types of mutual funds available, and some funds can also be a hybrid of one or more popular types.
Because mutual funds can vary significantly between types, it’s important to find out the specifics of a fund you’re interested in investing in — ask what the asset allocation is like, what the risk levels are like, what kind of investment horizon it is suitable for and so on.
Unit trusts vs ETFs
Mutual funds or unit trusts can sound pretty similar to exchange-traded funds or ETFs (a basket of assets), so let’s clear up some doubts here.
ETFs track an index, sector, commodity, or other asset, and the main difference is that they can be bought and sold directly on stock exchanges. Until further notice, the number of ETF stocks in circulation stays fixed, with buyers and sellers transacting on the stock exchange and prices being determined by demand and supply.
Some types of unit trusts such as index funds, which we covered earlier, similarly track indices. The difference is that the unit trusts involve investors pooling their money together. This money is then used to buy the securities in the portfolio. Fund managers can restrict or increase the number of units available based on whether investors want to buy or sell. These cannot be bought and sold directly on stock exchanges.
In general, unit trusts also tend to have a higher expense ratio (ie. they are more costly for the investor) than ETFs due to the more active role played by the fund manager.
Pros & cons of mutual funds
Mutual funds can be a worthwhile addition to many portfolios, but as with all things, there are pros and cons.
Pros of mutual funds
- Diversification — Mutual funds offer one of the easiest ways to manage risk through diversification. A diversified portfolio is less risky because you’re not putting all your eggs into one basket. If one asset bombs, you’ve still got others to balance the risk.
- Low barrier to entry — Diversifying your portfolio through manual asset-picking has a high upfront cost as you have to satisfy the minimum lot requirements for every single asset. With a mutual fund, buying a single unit offers exposure to an extensive list of assets.
- Liquidity — Mutual funds are easier to buy and sell than tangible assets, such as cars or houses. Investors can liquidate their investment into cash easily by redeeming part of the whole fund securities.
- Professional portfolio managers — Managing a diversified portfolio is tricky and time-consuming. Professional fund managers are constantly monitoring, buying and selling assets according to market conditions, and also rebalance portfolios regularly.
- Easy to use and understand — The key benefits of a portfolio are succinctly explained to you by the fund provider, so you should be able to get a good idea of the assets, risk levels, dividends (if any) and goals of any fund you are thinking of investing in.
- Security — In the US, mutual funds are under stricter regulation than other pooled investment vehicles.
Cons of mutual funds
- You don’t own assets directly — While mutual funds give you exposure to the assets in the portfolio, you technically do not “own” these assets. This means that you cannot buy and sell the assets directly on the market or fine-tune the asset allocation beyond the options offered to you by the fund manager, which can be a drawback for those who wish to manage their own portfolio.
- Fees or penalties — As mutual funds are professionally managed and administrated, you have to pay certain fees or penalties including management fees, redemption fees when you sell a unit, and subscription fees when you buy.
- Reliance on the fund manager — Having a fund manager is great if you are using a reputable company that hires skilled professionals, but it can be worrisome if you’re buying from a “no name” fund house. You should thus always do your due diligence and make sure you are buying from reliable fund houses.
What are some of the popular mutual funds right now?
Not sure which mutual funds to buy? Here’s a list of popular mutual funds you can buy through trading platform moomoo.
How to start investing in mutual funds?
The first thing you’ll need before you dip your hands in mutual funds is to sign up with a reliable trading platform. It’s best to go for one that is popular with other traders, such as moomoo powered by FUTU Singapore.
moomoo is Asia’s award-winning investment super app that is regulated by the Monetary Authority of Singapore (MAS) with over 17 million users globally. Via the moomoo app, mutual funds or unit trusts in the US, Hong Kong, and Singapore can be traded, as well as other securities that include Stocks, ETFs, Futures, Margin Interest, REITs and Options.
The app is user-friendly while offering smart features like AI monitoring, Stock Screener and Heatmaps in-app that enable you to customise your investment experience and spot market opportunities. The moomoo app features an intuitive interface that makes it really easy to navigate around and trade not just mutual funds but also other asset classes like stocks, options, futures, reits, ETFs and more.
With Money Plus, investors can set up auto investments and look up popular funds. There is also a funds in-app activity currently that users can leverage on when investing into funds (check out the following screenshots for more information).
Enjoy zero fees* for all funds till 31 March 2022 and start investing into 60+ funds from 20 asset managers under moomoo money plus. Buy different types of funds in one place, including equity funds, bond funds, dividend funds and balanced funds. This helps you diversify your investment and leave the complex decision-making to your professional asset managers — plus, with moomoo’s free courses and tutorials, you can beef up your funds investment knowledge to become an empowered investor as well.
Find out more about Asia’s award winning investment app, moomoo, here.
Sign up for an account to claim your limited-time welcome bundle of 1 Apple (AAPL) share worth about S$240 and more*. Enjoy 0 fees when you buy funds from moomoo money plus.
*Terms and Conditions apply
This article has not been reviewed by the Monetary Authority of Singapore.