FAQ: Investing your savings

1. Why should I save?

You should save for the following

a) Retirement
b) Child’s education expenses
c) Emergency needs, such as unemployment or medical bills
d) Down payment to buy a car or property

Try to save 10% to 15% of your regular savings.

2. How should I invest my saving?

You should invest in the following:

a) Large, well diversified fund
b) Low charges
c) Preferably in an equity fund

3. What type of investment gives the best return?

If you are investing over the long term in the future, I estimate the likely return from the various classes of investments to be:

:a) Equity: 6 to 8%
b) Bond: 4 to 5%
c) Cash or money market 2 to 3%

For long term investment, it is better to invest in an equity fund as it provides a higher return.

4. Are investments risky?

Investing in equity can be risky. If you buy an equity (i.e. share in a company) and sell it at a later date, you may get a price that is lower than what you paid for it earlier. You may make a loss.

Investing in a bond also carries the risk of a loss, but it is lower than for an equity.

On the other side, investing in equity or a bond also has the attraction of making a capital gain.

5. How can risk be reduced?

You can reduce your risk of a loss as follows:

a) Invest for 10 years or longer, to average out the good and bad years
b) Invest in a large, well diversified fund, to average out the good and bad investments
c) Spread out your investment over a period, to average out the cost of your investment
d) Choose a good time to realise your investment, i.e. when the market is high

6. What are the charges?

You may have to incur the following charges:

a) Upfront fee for each investment
b) Annual expenses of the investment fund
c) Additional fee for regular monthly investment
d) Administration fee

A low cost fund incurs the following charges:

a) Upfront fee of less than 1%
b) Annual expenses of less than 0.5%

The low cost funds are likely to be invested in a market benchmark. They are also called indexed funds.

A high cost fund incurs the following charges:

a) Upfront fee of up to 5%
b) Annual expenses of up to 3%

Most of the funds in the market have high fees, as they are actively managed in special sectors of the market.

7. How do I select the funds?

If you are investing for the long term, it is better to choose a low cost fund that is invested in a market benchmark.

You have the following options:

a) Indexed funds
b) Exchange traded funds

An indexed fund, like a unit trust, is traded based on its net asset value calculated on the daily closing prices. The fees charged by indexed funds in Singapore are generally higher than indexed funds available in other countries. You should check the fees with the fund manager.

To enjoy lower fees, you can invest in an exchange traded funds, which you can buy through your stockbroker. For example the fees of the STI ETF are:

a) Initial charge of 0.3% (payable as brokerage)
b) Annual charge of 0.3% (deducted as management fee from the fund).

Each ETFs has its own fees, but they are generally quite low.

8. Do I need to go through a financial adviser?

It is useful to get the service of a financial adviser.

Choose an adviser who is competent and honest (i.e. an adviser who will look after your interest.)

Find out about the fee that is being charged by the adviser. If the adviser earns a commission on your investment, the commission should be disclosed to you.

Allow the investor to earn a reasonable fee or commission, so long as you get the best advice that is in your interest.

9. Should I buy an investment-linked fund through an insurance agent?

You should find out the charges of the investment-linked funds.

Most of the investment-linked funds have high charges. This should be avoided.

If you are investing a monthly premium, you may have to incur an additional front end charge of up to 18 months of your regular savings. This is used to pay commission to the insurance adviser.

This additional charge is too costly. You should choose an investment-linked plan that invests your savings from the first month. If this is not available, it is better for you to invest in a unit trust, as it does not incur this additional charge.

If you choose the Ideal plan (ID7) from NTUC Income or a unit trust, you avoid this additional charge. 100% of your monthly savings is invested from the first month.

10. Do I have to pay a penalty for early withdrawal?

You should ask if there is a penalty for early withdrawal or termination of the savings plan.

Most unit trusts do not have this penalty.

Some investment-linked plans sold by insurance advisers have a high penalty for early withdrawal. This forces you to continue your savings plan for at least a few years. You should avoid such a plan, as it limits your flexibility and does not give you any advantage.

11. Should I monitor and switch my funds regularly?

If you are investing in a low cost fund for the long term, there is no need for you to monitor and switch your funds regularly. You should stay invested.

Some financial advisers may ask you to switch your investment, as they earn a fee from the transaction. You should be careful about this vested interest.

If the market is too high, you may switch out of equity and leave the money in a money market fund. This is to avoid the risk of a fall in the market. This type of switching should be done rarely. It is not easy to “time” the market.

If you need to make some withdrawal within the next few months, and the market is at a fairly high level, you can switch some of your investments into the money market fund. This allows you to lock in your gain and avoid the risk of market fluctuation on this portion of your savings.

12. Should I invest when the market is at a high level?

If you re investing a monthly saving, it is all right to make your investment at any time. You will be averaging out the cost of your investment over the years.

If you are investing a large sum, you can keep the money in a money market fund for the time being and wait for the market to correct to a lower level. A good time is when the market has corrected 10% to 20% from its recent peak.

The market correction may not come. In that case, you may have to split your large investment into a few portions and invest them over the next few months.

13. Do I need life insurance protection?

If you need life insurance protection, you should buy term insurance (i.e. level or decreasing term) to cover the period up to say, age 65.

The cost of the term insurance is quite low. You can ask for a quote from a few insurance companies before you make your decision. It is best that the term insurance be bought separately from your investment plan.

Some investment-linked products have the life insurance protection built into the plan. This is usually too costly for you. It should be avoided.

You only need to buy term insurance up to age 65 or earlier. When you reach that age, you do not need any life insurance as you are likely to have sufficient savings to meet your needs. Life insurance beyond age 65 is too costly and unnecessary.

If you buy decreasing term insurance, you pay about half of the cost of level term insurance. It covers the full sum assured during the first year. The sum assured reduces gradually over the term of the policy. You need a lower sum insured in the later years, as your savings is being built up over the years.

14. What types of financial products should I avoid?

You should avoid the following products:

a) Difficult to understand
b) Lacks transparency
c) Lock you for a long period
d) Imposes a penalty on termination
e) Lacks flexibility

Always ask for a simple FAQ that explains the key features of the product. If the FAQ is too complicated or leaves many areas of doubt, you should avoid the product.

15. What are the past returns from various types of investments?

Return up to 31/12/2006, converted to Singapore currency

Over the past 10 to 20 years, equities give a better return compared to bonds.

16. What is my projected amount for my savings?

17. Does a high expense ratio make any impact on my return?

If you invest over the long term, the amount that you can get on maturity depends on:

a) Return of the underlying assets of the investment fund
b) Charges that are taken away from the earnings

The following example shows the impact of an expense ratio of 1%, 1.5% and 2.5% for an annual saving of $2,000 yearly over 30 years, based on a gross investment yield of 5% per annum:

For a 30 year investment, the difference in the maturity amount could be as much as 35% (i.e. $89,000 compared to $136,200).