There are more than 300 unit trusts and insurance funds available for the public to invest.
The financial adviser can select the best performing funds and offer them to the investing public.
There is a danger in this approach.
The funds that perform well in the past may not perform well in the future. In fact, the academic studies have shown that actively managed funds generally perform worse than index funds, after deducting the fees.
In fact, if an fund has performed well by adopting a certain strategy, it is likely that the same strategy will perform below average in the future, as the results go in cycles.
So, if a financial adviser ask you to invest in a fund that performed well (and it is easy for them to pick these funds from the large numbers in the market), you are likely to make the wrong choice.
It is better to invest in a large, well diversified fund with low charges. Indexed funds fall in this category.
The investment funds operated by NTUC Income are large, well diversified fund with low charges. Our charges are 1% per annum, compared to 2% to 3% charged by unit trusts sold through financial advisers.
ReplyDeleteThe difference of 1% to 2% a year, can amount to a lot of money over 10 to 20 years.
By investing in a low charge fund, you can get 10% to 30% better return, just from the savings in the fees.
Usually, the independent financial adviser will recommend you to invest in a "good performing fund" out of the 300 over funds, but they do not tell you that the charges are high.