In the previous post, we look at what are the common fees involved when buying unit trusts and also how to compare between funds. In today’s post, we will be looking at the process of funds selection.
With hundreds of funds available to choose from, it can be incredibly daunting and overwhelming for a beginner investor to start investing in unit trusts. It is therefore imperative for one to have a selection process that one can follow when choosing unit trusts to invest in.
Step 1: Determining your Investment Objectives and Risk Appetite
We will start whittling down the number of funds to choose from by first understanding ourselves. More specifically, we must understand what our investment objectives are and how much risk are we willing to accept.
Using myself as an example, my investment objective is mainly to protect my savings against inflation. Therefore, the returns that I should aim for should be higher than the inflation rate, which I will assume to be 4%.
As for my risk appetite, I am quite averse to risk and do not wish to take any risk beyond what is necessary to fulfil my investment objective. I will therefore limit my assets classes to less risky assets such as fixed income or bonds and also limit the currency to Singapore’s currency (SGD) to circumvent any currency risk.
As we can see now, just by identifying my investment objective and risk appetite, I have managed to come up with a few criteria that will help me in narrowing down the number of funds for me to choose from.
Step 2: Choosing an Investment Strategy to Adopt
Determining your investment objectives and risk appetite are good for keeping yourself focused and narrowing down the number of funds to choose from, but these are not the only method available to you. Choosing an investment strategy to adopt can also help to further narrow down the number of funds to choose from. Before we choose which investment strategy to adopt, it is important for us to first know about the different types of investment strategies that other investors commonly adopt and to understand what each investment strategies entails.
1. Growth Strategy:
Growth strategy is a strategy that involves investing in developing countries, so that the investor can capitalize on the growth potential of the country and reap higher returns.
2. Dividend Yield Strategy
Dividend Yield strategy is adopted by investors who wish to have a passive yet stable income. This strategy involves investing in income producing funds.
3. Thematic and Sector Strategy
These two strategies are usually only adopted by more veteran investors who are experienced enough to have their own views on which investment themes or industry will grow due to changing trends in the marketplace. These strategies involve investing funds that are in certain key investment themes, industry or sector that the investor think will grow due to evolving trends only.
Personally, I believe that since I’m still a beginner investor who has limited experience in investing, both thematic and sector strategy are not suitable for me. Also since my risk tolerance is low, growth strategy is also not suitable for me. The stable dividend yield strategy is therefore the strategy most suitable for me due to my low risk appetitie and I will therefore only choose funds that adopts this strategy.
Step 3: Fund Selection
Now that I have laid a few criteria for myself as shown below, I can finally begin to select which fund to invest in.
1. Returns greater than inflation rate of 4%
2. Asset class limit to fixed income/bonds
3. Currency limit to SGD
4. Dividend Yield Strategy
First, I will be using fundsupermart’s fund selector tool to assist me in finding funds that meet the criteria set above.
Since I'm risk averse, for the risk rating, I will begin with the lowest risk rating possible, "0 - Lowest Risk". Unfortunately, there are no funds available that meet all these criteria. I will therefore relax my criteria and increase the risk rating slightly to, "1 - Lower Risk".
At risk rating of "1 - Lower Risk", I have managed to find a fund that fulfills the criteria that I have set before.
I will then repeat this process for the different risk rating up to the risk rating of "5 - Moderate Risk", the results are as shown below:
Based on the criteria that I have set above, I have therefore managed to narrow the funds for me to choose from to these funds:
Risk Rating: 1 - Lower Risk:
- Eastspring Investments UT SG Select Bond Fund
- 5 Years Returns Ann: 5.55%
Risk Rating: 3 - Moderately Lower Risk:
- Schroder ISF GLB CO BND SGD Hedged A Dis
- 5 Years Returns Ann: 4.61%
Risk Rating: 4 - Moderately Low Risk:
- United Asian Bond Fund Class SGD
- 10 Years Return Ann: 6.22%
- Eastspring Investments MIP M
- 10 Years Return Ann: 5.03%
- Eastspring Investments MIP A
- 10 Years Return Ann: 4.99%
- Schroder Global High Yield Fund
- 10 Years Return Ann: 4.28%
- LionGlobal Asia Bond SGD
- 5 Years Return Ann: 8.66%
- Aviva Inv Glb HY Bd Amh SGD-H
- 5 Years Return Ann: 6.72%
- Blackrock USD High Yield Bd A3 SGD-H
- 5 Years Return Ann: 6%
Risk Rating: 5 - Moderate Risk:
- United Emerging Markets Bond Fund
- 10 Years Return Ann: 5.65%
- Fidelity Asian HY AMDIST SGD Hedged
- 5 Years Return Ann: 6.34%
Therefore as seen above, just by determining one's investment objectives, risk appetite and investment strategy to adopt, we can whittle down hundreds of funds to choose from to a mere 11. This has thus demonstrate to us, the importance of having and following a fund selection process when investing in unit trust.