More and more of those who have recently retired are interested in investing in funds. One of the main reasons is that people get to live longer and they need to find sufficient financial means to maintain a longer retirement life. While interests from bank savings and low-risk products, like bonds and annuities, remain low, we need to look for other means to preserve not only the purchasing power of the capital, but also a reasonable return which can give us a reasonable recurrent income to meet the basic means of life.
Mandatory Provident Funds
The most common fund investment in Hong Kong is probably the Mandatory Provident Funds (MPFs). Currently there are five major types of MPF funds for scheme members to choose from, namely MPF conservative fund, guaranteed fund, bond fund, mixed assets fund and equity fund. Their risk levels range from relatively low to relatively high, and their annualised rate of return range from 0.7% to 5.5% (Dec 2000 to Dec 2017, Source: MPFA).
Managed Funds
There are also Managed Funds which may produce a return which is higher than the MPFs but the risks can correspondingly be higher. These funds are usually umbrella funds investing in bonds, stocks, equities and other instruments including derivatives, which are subject to risks to the capital and the income expected to be generated from the investment. For example, for funds which invest mainly in stock, the value of the funds may fluctuate in response to market changes and performance of the companies. But for those which invest mainly in bonds, the value of the funds could be more stable but the return is subject to market interest rate, credit rating of issuers and is therefore comparatively low. Higher risks also exist in funds which invest in emerging market securities or in a single market sector or country. For funds which use derivatives extensively in their investment, the risk level is even much higher. If investing in a foreign currency, the fluctuation in the value of the currency is also a factor not to be ignored.
Administrative fees are deducted from the funds at the start of subscription, it is therefore considered that investment in managed funds of this nature is for a longer period though in theory they can be redeemed anytime according to the terms of individual funds. Investors would get a certain level of dividend on a monthly basis and subject to the performance of the funds, the dividend may be paid out from the capital amount resulting in a reduction of the net asset value. Managed funds can be acquired from banks or financial institutions.
Before deciding which fund(s) to invest in, you should learn about your risk tolerance level. Here are three key factors to consider:
  • How many years are there before you cease to receive any recurrent income from employment?
  • Can you set aside a certain amount of savings or earnings (e.g. rental income from properties) after providing for your and your dependents’ daily maintenance?
  • How much risk are you prepared to take?
After assessing your risk tolerance level on your own, do check with the banks or financial institutions about the risk level accorded to you for investments. They will ask you questions about your experience in investment, the purpose of investment, the percentage of the money to be used for investment against your total asset and family spending, etc. After knowing the risk level you can afford to take, you should only consider those funds with risk level not higher than that you can afford. The scope of investment activities of each fund, its objective, focus, track record, risk and return profile, and administrative fees should all be considered.
Generally speaking, the fees of passively managed funds (like index funds) will be lower than actively managed ones. Also, a portfolio diversified across asset classes, industries and markets has a much better chance of delivering long-term returns than one with a narrow scope.
While studying the pricing structure and fees associated with the fund is necessary, the most important thing is to make sure the fund(s) you choose fit well with your retirement planning. Failing to do so may result in unexpected losses in your investments.