Make your money work harder

Should you invest in safe but slow-growing unit trusts? Or something riskier with better returns? Cheryl Ong lays out your options.

Before You Invest…

Anne Tay, senior manager of financial services at Manulife (Singapore), suggests you run through this "TOLERANCE" guide first.

Time horizon If you have family commitments or are older, you have a shorter investment period and may need to invest in safer funds; if you're younger, you may be able to distribute more of your funds to investments with a greater risk, but with potentially higher returns.

Objectives

What are your aims? Think about major life events, like buying a car, a house or saving up for your retirement.

Liquidity ratio

Do you have emergency funds set aside (ie, six months' worth of living expenses?) This should not be used for investment purposes.

Expenses

Are there any costs involved? Some financial planners or fund houses charge annual service and management fees. For example, you pay transaction-based brokerage fees if you trade in equities and exchange-traded funds.

Risk

Do you know your risk appetite (conservative or aggressive) and risk muscle (can you sustain potential losses)?

Asset class

Never put all your eggs in one basket. Different investment instruments - equities, bonds, investment-linked policies, unit trusts and property - have different risk levels, so diversify to balance the risks.

Now

Where are you at in your life? If you have a home loan or are saving for your children's education, you won't want to lose your capital.

Competency

Should you rely on the expertise of financial planners, or do you have enough experience to do it on your own?

Expectations

How much are you hoping to see in returns? It should correspond with your aims, portfolio and risk appetite.

Now Pick The Right Tool…

Minimal Monitoring, Low-risk & Affordable

• Investment-linked Plans

WHAT

These are life-insurance-cum-investment plans. The premiums you pay go to your insurance cover, as well as to investment funds managed by the insurance company.

WHY CHOOSE THIS

Insurance protection aside, Anne says it's a good starting point if you're on a budget - you can start from as little as $100 a month. The investment funds are also relatively low-risk and you have the flexibility of switching them around to diversify your portfolio. And you don't have to keep tabs on the plan - your insurance agent will review your policy's performance with you annually.

WHAT TO CONSIDER

Your age. "The risk of death, disability and illness increases with age, so investment-linked plans cost more for those who are older," says Anne. Even if your monthly premiums are the same as those of someone younger, a bigger proportion of your premiums may go to insurance coverage, leaving less for investment. Thus, your returns may not be as good.

• Unit Trusts

WHAT

Investors pool their money into a fund, which is managed by professional fund managers. These funds are a basket of stocks, which can include bonds, equities and other financial commodities.

WHY CHOOSE THIS

You get relatively safe returns for zero monitoring. "You get a monthly fact sheet to show you how the funds are doing," says Henny Muliany, head of channel distribution at Aberdeen Asset Management.

Unit trusts let you invest affordably because of economies of scale. Henny explains: "For example, a unit trust has 100 stocks, including local and global bonds, equities and properties. We buy these stocks, divide them into units, and resell them to investors for a minimum of $1,000. This gives you shares in all 100 companies, and is much cheaper than buying individual stocks in each company on your own."

WHAT TO CONSIDER

Your risk and returns depend on how the investments are distributed. Investing in foreign markets carries the risk of currency-rate fluctuations. Also take into account the management fees for running your funds - for equity funds, it can range from about 1.5 to 1.75 per cent annually; for bonds, about 1 to 1.5 per cent.

MINIMAL MONITORING, LOW-RISK BUT COSTS MORE

• Bonds

WHAT

Think of them as you lending money to a company. In return, the company pays you an interest at fixed intervals, and promises to pay back the sum in full when the bond period ends.

WHY CHOOSE THIS

Bonds are for people who prefer a secure, low-risk form of investment, as they provide a steady stream of income until the bond period ends.

Nicholas Tay, content and marketing manager at Fundsupermart.com, explains: "Companies have to pay bondholders before they pay stockholders, in the event that they need to prioritise their payouts.

So if you buy bonds from companies with a good credit rating, you're likely to get your money back."

In times of low interest rates, fixed-interest investments like bonds are attractive, as they give you an average of 2 to 3 per cent return on your investment.

WHAT TO CONSIDER

"Most bonds have a minimum subscription fee of $100,000 or more, which puts them out of reach for the average investor," says Nicholas.

He also explains that if a company's bonds are classified as high yield, they have a greater risk of defaulting on payment if things go wrong. However, it also means that they give better returns when things are smooth-sailing.

MORE MONITORING, HIGHER RISK, BUT AFFORDABLE

• Exchange-traded Funds

WHAT These funds invest in a stock market index or basket of stocks - much like unit trusts, except that they can be traded like stocks and shares.

WHY CHOOSE THIS

Like unit trusts, exchange-traded funds allow portfolio diversification, and help reduce your investment risks over time. "If the markets are stable, exchange-traded funds will also remain relatively stable," notes Nicholas.

They are a good option for traders who actively buy and sell stocks on the exchange during the trading day, and long-term investors who want to balance out their investment portfolio risks.

WHAT TO CONSIDER

Because exchange-traded funds are traded on the stock exchange during trading hours, you may not be able to react as nimbly to changing market conditions as professional fund managers can, says Nicholas.

MORE MONITORING, HIGHER RISK BUT WITH DIFFERING PRICES

• Equities

WHAT

Also known as the stocks and shares of companies listed on the stock exchange.

WHY CHOOSE THIS

Nicholas says: "More financially savvy investors choose to go into equities, as they can pick their own stocks and will invest in the time to monitor the markets closely."

He explains that equities can range from low- to high-risk, but their potential returns are much higher than bonds.

Over time, the money you put into equities could give you the best returns, compared with other investment instruments.

WHAT TO CONSIDER

"In Singapore, shares are traded in lots of 1,000 - you must buy at least 1,000 shares at a time. The average investor may not be able to afford that," Nicholas says.

He adds that equities are also riskier than bonds because share prices fluctuate every day - you must be able to ride out the volatility, and understand that there is no guarantee that prices will rise again.

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