I want to invest in mutual funds but am wary of using the services of a financial adviser. What’s the easiest way for a novice to get involved, and how do I interpret the information on a mutual fund fact sheet? KJ, Dubai
Sam Instone, chief executive of AES International
You are right to be wary of financial advisers within the UAE. In my experience they tend to be insurance salespeople who hawk expensive and superfluous products in exchange for hefty commissions. A little bit of knowledge can save time, money and heartache. So here are my tips:
1. If you have simple requirements, then a do-it-yourself model will save on the cost of advice. If you know the right fund platform, then you can avoid the 5.25 per cent bid/offer spread that many retail clients pay when buying mutual funds. These accounts offer you 24/7 access to a wide range of investment products.
2. If you are a novice, there are plenty of books on how to begin investing. When choosing funds and building a successful portfolio, this is based on your own attitude to risk and timescale, however everyone should follow these guidelines:
• Don’t select solely on past performance – it is never a guide for future returns. The best performing fund one year could be the worst performing the next.
• Using low-cost funds, like passive funds, can add real value as less of your return is being swallowed by fees.
• Limit the amount you invest in each fund – do not be tempted to put all your money, or even half, in one undiversified fund. Spread the risk.
• Diversify – choose funds which invest in different sectors and different areas of the world. If you invest some of your portfolio in higher risk or less developed markets, like Asia or Latin America, this is where an active manager with local knowledge could be a good choice.
• Avoid highly specialised funds. Funds which invest in just one thing, such as retirement care homes, car parks, storage or agriculture stocks, can be risky.
3. If you have complex requirements or are investing over $250,000 then take professional advice from a fee-based adviser. Within the UAE, these are often found in Dubai International Financial Centre and ensure they are chartered (like an accountant).
4. If you are set on buying mutual funds, then these are the key parts of a fund fact sheet:
• Investment objective and policy: this summarises the fund’s aims and objectives and details whether the fund is focused on income, growth or a combination of both; what sorts of industries it invests in and in what countries and regions.
• Fund facts: this outlines the date of the fund’s inception and its size – the total value of the fund. It takes a while for new funds to bed down, so avoid one that’s been around for less than a year. The longer a fund’s track record, the more you can rely on its performance data and the larger it is, the less vulnerable it is to being wound up if panicky investors flee.
• Investment information: this explains the costs of investing, including the initial charge – paid every time you make an investment in the fund – and the Annual Management Charge (AMC), paid annually to the fund manager. The OCF is the ongoing charges figure, which includes the AMC plus any expenses from the fund’s day-to-day management. The OCF is the main cost of a fund; the older and still widely used name is the total expense ratio.
Most people are capable of managing their finances without any involvement from a financial adviser. You only need advice if you have complex financial affairs or at certain times when you require specialist knowledge – for example retirement, buying property or experiencing a major life change such as divorce, having children or estate planning.
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