Technical Savings and Investments Information

Benefits of Investment Funds

The benefits of investment funds have been well summed up by one of the many quotations: “they offer people with limited time, or limited investment skills or modest means, access to investment returns available only to more sophisticated investors who are able to buy their own professional advice. They generally entail less risk than direct holdings of securities, and offer economies of scale.”

Some of the major benefits are summarized as follows.

(a) Diversification
Investment funds provide an assortment of investment options. They offer growth, income, or a mixture of both, and the opportunity to invest in international markets, as well as in the local market. Investment managers typically establish a portfolio of as many as 50 to 200 or more different securities.

In effect, they are putting the investors’ money in many baskets instead of just one. Traditionally, only large institutions and “high net worth” individual investors can attain the diversification on their own. This is now made available to mass investors through investment funds.

(b) Professional management
With investment funds, investors have access to professional, expert and full time investment managers who base their buying and selling decisions on extensive and ongoing economic research. After analyzing macro-economic conditions, stock market conditions, interest rates, inflation and the financial performances of individual companies, they select investments that best match the fund’s objectives. Again, only large institutions and high net worth individual investors used to enjoy the service of such professional investment managers but investment funds have made this type of financial expertise accessible by the mass market.

(c) Growth potential
Investment funds create possibility of higher long-term returns than conventional savings. As a matter of fact, one reason for the phenomenal growth of investment funds is their performance record in relation to what individual investors might expect by investing on their own. Of course, performance varies from fund to fund, but on average and over the long run, the growth of equity funds has paralleled the growth in the US economy.

In addition, bond and money market funds have also reflected the long-term movements in their respective markets.

(d) Convenience
Investment funds are easy to buy. Investors can purchase most types of funds through a professional licensed representative of an investment company. The intermediary can help analyze the investor’s financial needs and objectives and recommends the appropriate funds. Nowadays, most of the commercial banks in Hong Kong also establish their own investment funds or sell for the investment companies.

Investors, depending on the availability of secondary market and subject to the terms of the funds, also have access to their money. They can redeem all or part of their investment on any business day and receive the current value of the investment, which of course may be more or less than the original cost. Payment for redeemed investment will generally be made within a few business days.

(e) Access to global markets
Some markets may not allow access by foreign investors. However, international investment companies may be able to establish a local company and thus invest into the market. This provides additional opportunity to investors who may otherwise not be able to take advantage of the investment opportunity.

(f) Flexibility
Investment funds offer various features that allow investors to stay in control of their investment. Investors can choose the type of investment that most fits their own investment objectives and risk tolerance.

(g) Liquidity
Most of the investment funds are readily marketable at a price equal to the net asset value (NAV). Investors can therefore realize their investment easily without having to make a substantial price concession.

(h) Affordability
For those investors with moderate financial resources who wish to invest in the stock market, they could only purchase stocks in odd lots, which result in high brokerage commission. Moreover, they would have to sacrifice the benefits of diversification. Economies of scale in investment funds make such investment possible to the mass market. Furthermore, investment funds are available in small units that make them affordable even to the mass market. Investors can get an investment program started for HKD10,000 (or lower). Subsequent and regular monthly investments can be made for as little as HKD1,000.

(i) Cost efficiency
Investors sometimes have the feeling that investing in investment funds are expensive given that they are charged an upfront (front-end load) commission of up to 5%. However, with this amount of money they are hiring the professional service of some world class experts in their particular field to make the investment decision for them. Furthermore, the investment companies often employ “state-of-the-art” computer equipments that can never be afforded by any individual investors. Moreover, dealing and administrative costs would be greatly reduced by pooling the investors’ funds together to take advantage of buying in bulk.

(j) Administration
Investors do not have to perform any administrative work associated with managing their own portfolios, such as handling payments connected with share trading, registering shares, arranging for custodian, collecting dividends and applying for rights issues.

(k) Protection
The assets of the investment funds are typically protected by the trustees, or custodians, who have the responsibility to act in the interests of investors, owning the investments on their behalf. It is also the trustee’s role to ensure the investment is made according to its investment objectives while the custodian will be responsible for the safekeeping of the assets. 

Investment fund business is highly regulated. In Hong Kong, investment funds must be authorized by the SFC before being marketed to the public. Although SFC authorization is not a guarantee of an investment product, it has made specific requirements necessary before authorization will be granted.

(l) Up-to-date investment position
Most investment funds publish the bid and offer price, and their NAV if applicable, daily on newspapers. With the advance in technology, some of them even make their information available through the internet.

(m) Automatic reinvestment of gains
Most investment funds allow investors to automatically reinvest their dividends and capital gains to purchase additional fund units/shares at no extra cost. Over time, the power of compounding may significantly increase the value of investors’ assets.

(n) Switch privilege (into other funds)
Within a fund family, investors can generally switch all, or any portions, of their investments into other funds with different objectives as their financial situations, and thus investment strategies, change.