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The first step to success is when you master the basics

Investments can be confusing, especially if you are just getting started. Here at PCM, we believe that helping you understand some fundamental concepts can help to clear your doubts and guide you on the route to successful investments.

Understand Yourself

To kick-start your investment journey, you have to first know yourself. Spend some time to think about your financial goals:

  • Are your goals short-term (buying a car, travelling, etc.), or long-term (purchasing a house, children’s education plans, your retirement plans)?

  • Your commitment level?

    • How much time do you have before you will need the money?

    • Are you able to achieve these goals with your current monthly savings?

    • What is a comfortable amount for you to contribute regularly to achieve your goals?

  • What is your risk tolerance?

After you have answered these questions, you may want to start to take a look at some investment tools to help you make a rough plan for yourself or to consult a financial advisor for a more comprehensive planning framework.

Familiarise Yourself with Basics

Types of investments

  1. Stocks – Refer to ‘shares’ of a company. This means, you get a portion of ownership in the company. The more shares you buy, the bigger your stake in the company.

  2. Bonds – They are debt instruments, like loans, whereby the investor is loaning money to a company or agency in exchange for periodic interest payments.

  3. Cash – In addition to physical cash, this category includes investments like money-market accounts and savings accounts. This type of investments have the lowest risk, but also the lowest return potential.

  4. Unit Trusts – A fund composed of investors’ money, which is invested in a variety of financial assets. The pool of fund is managed by a fund manager where he will use it to buy stocks, bonds and other securities, depending on the unit trust’s objective.

  5. Exchange Traded Funds –  ETFs are investment funds traded on stock exchange, similar to stocks. But unlike a stock, ETF tracks an index.

Unit Trusts or ETFs as investment solutions

Knowing how to properly allocate your assets is important as it can help you manage risks and eventually meet your desired goals. There are definitely no model answers as to what is the best way to allocate your assets.

A classic way would be a portfolio combining bond and equity assets. This is so, as the prices of these two asset classes generally move in opposite directions; when equity markets are down, bond prices usually remain high.

For some investors, mutual funds (Unit Trusts) can be a smart and cost-efficient way as they have minimal investment requirements. Buying shares in a fund is also an easy way to diversify your portfolio and spread risk.

 ETFs, on the other hand, has also gained popularity amongst millennials and working adults throughout the years. Their passive index-tracking strategy is seen as a solution for diversification.

Learn more about the difference between Unit Trusts and ETFs: here

Types of funds

  • Equity funds – Also known as stock funds, equity funds are mutual funds that invests principally in stocks. They are principally categorised according to company size, investment style of the holdings in the portfolio and geography.

  • Bond funds – Also known as debt funds, debt funds invests in bonds or other debt securities. They typically pay periodic dividends that include the fund’s underlying securities.

  • Money Market funds – They consist of high quality, short-term instruments such as high quality government and corporate bonds, commercial bills and fixed deposits.

  • Balanced funds – also known as hybrid funds, balanced funds owns both stocks and bonds. They are named ‘balanced’ as they keep a balance between the two asset classes by usually placing about 60% of their assets in stocks and 40% in bonds.

In any investments you decide to go into, there is always a trade-off between risk and return. A fund that promises a potential higher return usually comes with greater risk and vice versa. Think about the best way to reach your financial goals without compromising your risk appetite.

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