1. What is “unit trust” and “mutual fund”?
“Unit trust” means any arrangement made for the purpose, or having the effect, of providing facilities for the participation by persons as beneficiaries under a trust, in profits or income arising from the acquisition, holding, management or disposal of securities or any other property whatsoever.
“Mutual fund” means any arrangement made for the purpose, or having the effect, of providing facilities for investment in shares in a corporation which is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities or any other property whatsoever and which is offering for sale or has outstanding any redeemable shares of which it is the issuer.
A unit trust or a mutual fund refers to a collective investment scheme under which professional fund managers pool money from individual investors and manage it according to pre-set investment objectives. The investment objectives can range from maximizing capital gains to maintaining a stable stream of income, and from beating inflation to preserving capital. Based on the designated objectives, the fund manager will invest the money in equities, bonds, currencies or other relevant investment instruments in a specific market or different markets around the world.
Funds must be authorised by the Securities and Futures Commission before they can be marketed in Hong Kong. They must meet the requirements of the Code on Unit Trusts and Mutual Funds which covers investment restrictions, the eligibility of the fund manager / custodian / trustee, information disclosure and operational policy. However, SFC authorisation is not an official recommendation of a fund nor does it guarantee a good return.
2. What are the advantages and disadvantages of funds investment?
Many Choices, Low Minimum Investment
With a minimum investment, usually of US$1,000-US$2,000, investors can invest in a wide array of securities through fundsand invest in different financial products in different market.
Access to Professional Investment Management Services
Investors can enjoy the services rendered by fund managers. Funds managers will make decisions based on extensive research into the performance of individual stock or other security issues as well as the fundamentals of the economies and market trends.
Divert the risk by investing in different markets with a wide range of products. A portfolio can help investors to spread out the risks and achieve a better risk-return behaviour than individual securities.
Capture Global Investment Opportunities
Investors can choose to invest in local as well as overseas funds and benefit from global investment opportunities.
Capital Growth Potential
Fund managers will help investors to identify investment opportunities and obtain higher returns on capital.
Easy to Buy
Procedures of fund purchase are very simple. Investors can buy through banks, brokers, independent financial advisors or direct from fund houses.
Unable to Pick Stocks
Fund investment deprives investor’s decision-making power to choose stocks.
Riskier Than Bank Deposits
Most fund types would be riskier than bank deposits.
Unable to Know Real-time Fund Price
Investor will not know the real-time price at which they buy or sell funds. Most funds are dealt on a daily basis using a forward pricing basis. When investors buy or sell or switch in or out of a fund, they do not know the buy/sell price at which the transaction will be executed until the next dealing day.
3. What are the general types of funds?
Funds are commonly divided into the following categories, based on their investment objectives and policies:
A balanced portfolio that aims to provide both capital gains and income. This type of fund may invest in global equity, fixed interest and money market instruments; and usually the investment in a particular asset class does not exceed a certain percentage.
An equity fund that primarily (usually not less than 70%) invests in equities with the aim of maximizing capital gains. The type of equities invested can range from domestic to international; and from blue-chips to small companies shares.
A bond fund that invests predominantly (usually not less than 70%) in bonds and other fixed income securities which can be issued by governments, municipal states, corporations, or other issuers.
Money Market Fund
A money market fund that invests in short-term money market instruments (usually less than one year), such as government securities, term papers, bank deposits; and other assets denominated in different currencies.
Warrants or Derivatives Fund
A warrant fund typically invests in excess of 70% in warrants or related instruments and these funds may be highly geared whereas a derivatives fund invest in geared financial instruments, such as futures, forward contracts and options to maximize capital appreciation.
Convertible Bond Fund
A convertible bond fund invests predominantly – usually not less than 70% – in convertible bonds and preference shares. Convertible bond refers to an instrument which has an option to be converted into equities at some pre-determined date in the future.
A guaranteed fund refers to funds that usually limit investors’ loss over a certain period, by way of a legally enforceable guarantee.
Fund of Fund
A fund of fund refers to a fund that invests in other funds, rather than investing directly in stocks, bonds or other securities.
4. Which type of funds with higher risk compare to the bank deposits?
Risks and returns vary with the types of funds. Higher risks go with higher returns and vice-versa; and risk appetites vary with an investor’s age, income and financial position, as well as his investment objectives and risk tolerance level.
When evaluating a fund, investors should assess their risk tolerance level based on the age, marriage status, income level and financial status. Select a fund that meets the investment objective and risk acceptability.
5.What kind of information can an investor get from a fund house / intermediary?
A fund house or an intermediary will provide the following to investors:
– Prospectus or explanatory memorandum
– Latest audited annual report
– Latest un-audited semi-annual report
– Application / subscription form
– Other pertinent information which the fund house or intermediary deems as appropriate
Once invested in a fund, the investor will receive regular statements (monthly or quarterly) providing the investor with the latest status of the portfolios (including valuation as well as number of units). Investor may also receive regular newsletters or reports which will usually provide market views, news on products/services, as well as activities. All these materials are required to obtain prior approval from the SFC.
6. What should an investor consider when investing in funds?
When making a decision on what funds to invest, investors should consider the following factors. Investors should carefully read the prospectus / explanatory memorandum or other relevant documents, and also the interim report / annual report of the issuers before making the investment decision.
– Personal financial situation
– Investment goal
– Risk tolerance
Information on Fund Manager
– Fund manager’s reputation
– Total funds under management
– Investment process and infrastructure
– After sales service
– Historical track record – consistency and absolute results
– Fund manager’s expertise and experience with this fund
– Whether it suits your personal situation
7. What kind of protection will the investor get?
When invest in a fund, the investments are held within a trust structure, separated from the fund manager’s assets. The trusts’ dealings are supervised by an independent trustee and the general supervision of the Hong Kong Securities and Futures Commission.
8. How can investors make money out of funds investment?
Investor usually make money out of funds investment in 2 ways:
Appreciation in value of the underlying stock or bond investments
Dividend or interest income paid out from the fund. Dividends can be taken in cash or be reinvested in the fund. Investors should check the prospectus for the distribution policy of the fund. The fund manager will usually specify whether he is going to make any distribution, and if yes, the frequency and timing.
9. What are the main fees and expenses?
Fees charged to investors include subscription fees and redemption fees. Fees charged on funds include management fees, performance fees and trustee fees. The fees and charges can be found in the fund’s offering document.
Risk Disclosure Statement
Investors should note that investment involves risks, price of investment fund units may go up as well as down. Past performance information presented is not indicative of future performance. Investors should read the relevant investment fund’s offering documents (including the risk factors stated therein (in particular those funds investing in emerging markets)) in detail before making any investment decision.
Risk Disclosure of Buying/Selling Mutual Funds
Risk of Investing in Mutual Funds
|The price of a Mutual Fund may fluctuate, sometimes dramatically; it may move up or down and may even become valueless. It is likely that loss may be incurred rather than profit made as a result of buying and/or selling a particular Mutual Fund. Past performance figures are not indicative of future performance. The customer should carefully read the prospectus and any other offering documents before making any investment decisions, and thereafter, should regularly check for update of information relating to the Mutual Funds.
Individual Mutual Fund has distinct investment focus. The customer should understand his/her investment objective, strategy and different level of volatility and risk that may be associated with it to ensure that the Investment Fund is suitable in light of the customer’s financial position and investment objectives.
Emerging Market Funds
|While investments in emerging markets can yield large gains, they can also be highly risky as they could be unpredictable and there may be inadequate regulations and safeguards available to investors.|
|Where government intervention in markets, perhaps in the form of exchange control laws or restrictions in the repatriation of profits, may affect the value of an investment or an investor’s ability to enjoy its benefits.|
Hedge Funds / Alternative Investment Funds
Investment Strategy Risk
|Hedge Funds or Alternative Investment Funds use derivatives for directional investing and/or are allowed to go short and/or use significant leverage through borrowing. Investment strategies of such Investment Funds are often high-risk. Due to leverage, a small movement in the market can lead to a major gain, but any losses will also be magnified sharply. The entire amount of the customer’s investment can, under certain circumstances, be lost.|