Protect Your Investment Funds: Strategies For Savvy Investors

Investing is a great way to build your wealth over time, and investors have a range of investment options, from safe lower-return assets to riskier, higher-return ones. When it comes to investing, there are no guarantees. The value of your investments can go down as well as up, and you could make a loss. If you decide to invest, it's recommended that you do so for the long term (at least five years) to ride out any bumps in the market.

Funds are a popular way to get started with investing. A fund is essentially a collective investment, where you pool your money with other people rather than choosing and buying individual shares. Funds usually contain a range of shares or other assets, often based on a specific theme, for example, European markets, green companies, and corporate bonds.

There are two types of funds: actively managed funds and passive funds. Actively managed funds are frequently bought and sold with the aim of delivering a return that's better than the stock market. Passive funds, on the other hand, track a market and aim for steady performance rather than maximising returns.

When deciding how to invest your funds, it's important to consider your risk tolerance, time horizon, knowledge of investing, financial situation, and how much you can invest. You should also be aware of the fees associated with investing, as these can eat into your returns.

One way to invest your funds is through a stocks and shares ISA, which shelters you from various taxes charged on investments made outside an ISA. You can also use an online platform, which is a one-stop shop for investing in funds, or a robo-fund, which is ideal if you're not sure what you're doing.

Before investing, make sure you do your research and understand the risks involved. Remember, investing is generally a long-term option, and you should only invest money that you can afford to lose.

Emergency funds: Keep your money in a checking account or savings account for immediate access

Emergency funds are crucial to protect you from unforeseen financial shocks, such as medical bills or home repairs. Here are some reasons why keeping your emergency funds in a checking or savings account is a good idea:

Accessibility and Liquidity

It's essential to have immediate access to your emergency funds in case of unexpected expenses. Checking and savings accounts offer high liquidity, allowing you to withdraw funds without delays or penalties. This accessibility ensures you can pay for emergencies promptly.

Safety and Security

Both checking and savings accounts are considered safe options for your emergency funds. Money in checking accounts is easily accessible, while savings accounts offer a layer of protection by keeping your emergency funds separate from your daily finances, reducing the temptation to spend it.

Interest Earnings

While checking accounts typically offer minimal or no interest, savings accounts can provide interest earnings on your emergency funds. High-yield savings accounts, in particular, offer competitive interest rates, helping your emergency funds grow over time. This can be especially beneficial in offsetting the effects of inflation.

FDIC Insurance

Funds kept in checking or savings accounts are often insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA). This insurance protects your deposits up to $250,000 per account, providing an added layer of security for your emergency funds.

Easy to Set Up Automatic Contributions

You can easily set up automatic recurring transfers from your checking account to your savings account for emergency funds. This helps you save consistently and build your emergency fund over time without much effort.

Peace of Mind

Keeping your emergency funds in a dedicated checking or savings account gives you peace of mind, knowing you have a financial cushion to fall back on during challenging times. It helps you avoid relying on credit cards or loans, which can lead to debt and higher interest rates.

Liquidity: Opt for liquid assets like money market accounts, high-yield savings accounts, and CDs for quick conversion to cash

Liquidity is a key consideration when investing your funds. Opting for liquid assets means you can quickly convert your investments into cash if you need to. Here are some liquid assets to consider:

Money Market Accounts

Money market accounts are a type of interest-bearing account offered by banks or credit unions. They are a hybrid between a checking and savings account, providing both liquidity and a modest return on your investment. Money market accounts typically offer Annual Percentage Yields (APYs) of around 3-4%. They are also insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA), protecting your investment up to $250,000. Some money market accounts offer additional benefits such as debit card and check-writing privileges, giving you instant access to your funds.

High-Yield Savings Accounts

High-yield savings accounts, often offered by online banks, provide higher interest rates than traditional savings accounts. For example, while the average APY for a traditional savings account is around 0.3-0.45%, you can earn 3-5.5% with many high-yield savings accounts. Your money is typically FDIC-insured, and you can usually access your funds through online transfers, wire transfers, or check requests. However, with online-only accounts, you won't be able to access your funds at a branch location, and some methods of withdrawal may take several days.

Certificates of Deposit (CDs)

CDs offer a higher interest rate than a regular savings account, and your investment is protected by FDIC insurance up to $250,000. However, one drawback is that you usually have to pay a penalty if you cash out your CD before it matures, making it less liquid. To increase liquidity, you can create a CD ladder by purchasing several smaller CDs with different maturity dates, or opt for a no-penalty CD, which offers a slightly lower interest rate but more flexibility.

Liquid assets are an important part of your investment portfolio, especially for emergency funds. By choosing liquid assets, you can easily convert your investments into cash if needed, providing financial flexibility and security.

Risk tolerance: Assess your risk appetite and choose investments accordingly, such as stocks or bonds

Risk tolerance is a key consideration when investing. It refers to the degree of risk an investor is willing to take on and is often determined by factors such as age, investment goals, and income. Knowing one's risk tolerance helps investors plan their portfolio, including the types of investments they choose and the amount they invest.

Those with a higher risk tolerance are often willing to risk losing money in pursuit of potentially better results. This type of investor commonly has a good understanding of market volatility and strategies for achieving above-average returns. Their investments usually focus on capital appreciation rather than income preservation. Aggressive investors typically favour stocks, equity funds, and exchange-traded funds (ETFs).

On the other hand, investors with a lower risk tolerance tend to seek out investments with guaranteed returns and limited volatility. These individuals often opt for lower-risk options such as bonds, bond funds, income funds, bank certificates of deposit (CDs), money markets, or U.S. Treasuries.

It's important to note that risk tolerance can change over time as personal circumstances evolve. For example, an investor with a long time horizon may be comfortable taking on more risk, knowing they have time to recover from potential losses. Conversely, those with shorter-term financial goals may prefer lower-risk investments.

When determining one's risk tolerance, it's crucial to be honest about your financial goals, behavioural tendencies, and comfort level with uncertainty. Online risk tolerance assessments and questionnaires can also provide valuable insights.

Once an investor understands their risk tolerance, they can choose investments that align with their tolerance level and financial objectives. For example, stocks are generally considered riskier but offer higher potential returns, while bonds are less volatile but may take time to sell and typically provide lower returns.

By carefully assessing risk tolerance and conducting thorough research, investors can make more informed decisions about their investment strategies and build a portfolio that aligns with their risk appetite and financial goals.

Diversification: Diversify your portfolio to spread risk and maximise returns

Diversification is a key strategy when it comes to investing. By spreading your investments across a range of different assets, you reduce your risk and maximise your potential returns.

When you diversify your portfolio, you're essentially allocating your investment funds across a variety of financial instruments, industries, and geographic regions. This strategy helps to lower the impact of any single negative event on your overall investment returns. For example, if you invest all your money in one company's stock and that company performs poorly, you could lose a significant portion of your investment. However, if you invest in multiple companies across different industries, the impact of one company's poor performance is reduced as your other investments may perform well.

Diversification can also help you take advantage of different economic conditions. For instance, when interest rates rise, bond prices tend to fall. However, if you have a diversified portfolio that includes stocks and real estate, you can benefit from the potentially higher returns these assets may offer during a rising interest rate environment.

Additionally, diversification can provide a hedge against inflation. Certain assets, like cash and bonds, may not keep up with inflation over time. On the other hand, stocks and real estate have historically outpaced inflation, so including them in your portfolio can help maintain the purchasing power of your investments.

It's important to note that diversification does not guarantee profits or completely protect you from losses. It's simply a strategy to manage risk. When diversifying, it's crucial to consider your investment goals, risk tolerance, and time horizon. Different assets carry different levels of risk, so you should ensure that your portfolio aligns with your comfort level and financial objectives.

• Stocks: These represent ownership in a company and can provide growth potential over time.
• Bonds: Issued by governments and corporations, bonds offer a steady income stream through regular interest payments.
• Cash and cash equivalents: This includes savings accounts, money market accounts, and certificates of deposit (CDs). They provide liquidity and safety but may offer lower returns.
• Real estate: Investing in physical properties or through real estate investment trusts (REITs) can provide income through rents and potential capital appreciation.
• Commodities: Investing in raw or primary products, such as gold, oil, or agricultural goods, can help diversify your portfolio further.

Remember, diversification is an ongoing process. Regularly review and rebalance your portfolio to ensure it aligns with your investment strategy and goals.

Fees and charges: Understand the various fees associated with fund platforms and fund management to avoid excessive costs

When investing in funds, there are a variety of fees and charges that you should be aware of to avoid excessive costs. These fees vary depending on how and where you invest. Here are some common fees and charges associated with fund platforms and fund management:

Entry or Initial Charges

When investing in a mutual fund for the first time, you may be charged an entry load or initial charge. This fee covers the distribution costs incurred by the asset management company when promoting the fund. However, it is important to note that in some countries, such as India, regulations may prohibit fund houses from charging an entry load.

Exit or Redemption Charges

When you exit or redeem your investment within a specific period from the date of purchase, you may be charged an exit load or redemption charge. Fund managers impose this fee to discourage investors from opting out of a fund prematurely and to reduce the volume of withdrawals. Typically, this fee is around 1% of the redemption value and is often charged if you redeem your units within a year of investment.

Transaction Fees

Transaction fees are typically applicable for larger investments. For example, investments worth over a certain amount may incur a transaction fee, while smaller investments may not.

Expense Ratio

The expense ratio is an annual fee charged by the asset management company for managing the fund. It is expressed as a percentage of the fund's daily net assets and covers various costs such as sales, marketing, administration, distribution, and fund manager's fees. The expense ratio is usually higher for regular plans of mutual fund schemes compared to their direct plans.

Annual Management Charge (AMC)

The annual management charge is a fee paid to the investment company for managing your investment in a fund. It is included in the ongoing charges figure (OCF) and varies from fund to fund and between share classes.

Operating Expenses

Operating expenses are fixed fees that cover the costs of operating the investment fund. These may include legal and auditing services, printing and distribution of reports and notices, fees for custodians and administrators, and other administrative expenses.

Performance Fees

Some funds, particularly those with higher returns, may charge a performance fee if certain performance criteria are met. This fee is paid in addition to the asset management fee and is usually calculated as a percentage of the excess returns generated above a set target.

Portfolio Transaction Costs (PTC)

Portfolio transaction costs include expenses incurred from buying or selling investments within the fund, such as redemption fees, transfer fees, and broker commissions. These costs can be higher for property funds compared to equity or bond funds due to the additional transaction costs associated with property.

Investment Platform Fees

If you invest through an investment platform or broker, you will likely incur additional fees. These platforms typically charge either a percentage-based annual fee or a fixed amount each year. The choice between a percentage-based or fixed fee depends on the size of your portfolio, with smaller portfolios often benefiting from percentage-based fees and larger portfolios from fixed fees.

Financial Adviser Fees

If you seek financial advice or utilise the services of a financial adviser, you will need to pay additional fees on top of the other charges.

It is important to carefully review the fund prospectus, Key Investor Information Document (KIID), and the investment platform's or broker's fee structure to understand all the applicable fees and charges before investing. These fees can significantly impact your investment returns, so it is crucial to factor them into your investment decisions.

Frequently asked questions