How to pick funds
How to build a diversified investment portfolio
“Never put all your eggs in one basket” is an old adage still very relevant to investing today. A diversified portfolio invests in various asset classes concurrently, making it less vulnerable to excessive valuation swings and more conducive to achieving consistent returns in the long term.
A classic example would be a portfolio combining bond and equity assets. Prices of these two asset classes generally move in opposite directions: when equity markets are down, bond prices usually hold up. Equity assets are important for long-term capital appreciation, while bond assets bring stable income to a portfolio.
Types of funds
- Equity funds usually comprise stocks of companies only and can be invested in a single country, on a regional basis or a global basis. They can also be based on industry classifications (such as a property fund) or theme-specific ones (such as a fund focused on opportunities from rising consumption in China).
- Bond funds generally invest in bond securities of companies and/or governments. Broadly, there are investment grade bonds, with the majority of underlying securities rated BBB- or above by rating companies, and high yield bonds, which come with the potential for more attractive returns and higher default risk at the same time. Bond funds are also offered based on geographical exposure.
- Money market funds provide investors with a safe place to invest easily accessible cash-equivalent assets usually characterised as low-risk investments. They may not be suitable as long-term investment options due to the low returns.
- Balanced funds comprise a mix of equity and bond investments. Some promise regular income through a higher proportion of bond investments while others are aimed at long-term capital appreciation with more equity investments.
- Asset allocation funds, like balanced funds, also hold a mix of equity and bond investments. The difference, in this case, is the fund manager may adjust the ratio of bonds-and-equities mix based on his/her analysis of the investment environment.
In addition to asset classes, you should also seek to diversify your portfolio geographically and across industries. However, diversification cannot completely eliminate risk, and there is still the chance of a loss.