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The Proper Mindset for Investing
Unit trust investors have a greater likelihood of achieving their long-term financial goals when they invest with the proper investing mindset, taking into account their risk appetite, return expectations and time horizon, among others.
Having the proper mindset when investing in unit trusts will allow investors to obtain a realistic perspective of their investments. Due to misconceptions about investing, some investors may be disappointed when their expectations and needs are not met. Investors who have realistic expectations pertaining to their investments are more likely to achieve their long-term financial goals.
Below are several misconceptions about investing which investors should be aware of in their unit trust investments:-
- QUICK GAINS
- MISMATCH OF FUND’S RISK PROFILES WITH FINANCIAL GOALS Matching your fund’s risk profile with your investment objectives is an important determining factor for investment success. Investors need to first identify their risk appetite before a suitable portfolio can be built. By identifying the level of risk that they are comfortable in taking, financially and emotionally, they can then decide the types of funds that are appropriate for them.
However, a common error that investors make is not assessing their risk profiles properly. Because of this, investors tend to buy funds that do not match their actual risk profiles. For example, for conservative investors, their primary goal would be to achieve regular income. As such, they should not select aggressive funds but instead go for balanced or bond funds. Conservative investors may not have the temperament to withstand the high volatility of equity funds while investors who are looking to achieve high capital growth over time may not be able to fulfil their long-term investment goals by investing in income focused funds.
- EXPECTATIONS OF FIXED RETURNS AND PAST PERFORMANCE Compared to savings and fixed deposits, unit trusts do not offer investors fixed returns. The performance of a unit trust fund depends on the investment portfolio held by the fund as well as prevailing market conditions. In addition, historical returns do not indicate future returns of a fund as market conditions may change over time.
So, what should investors do instead?
The following are several pointers that will help investors to achieve their financial goals:-
- Taking a long-term investment horizon Investors with a long-term perspective need not worry about short-term fluctuations in their investments. Their investments will have the time to recover if the market moves against them in the short term. A bad year in the market can be compensated by a subsequent upturn in the market in the following year. The reality of investing in unit trust funds is that the portfolio’s value will move up and down in tandem with the market. Investors who stay invested have a much better chance of riding out the bad times or occasional setbacks and capitalising on the periods when the market recovers.
- Understand the principle of risks vs. returns against their financial goals All unit trust investments carry a certain level of risk, with some being more volatile than the rest. Investors should know their risk appetite and be able to tolerate fluctuations in the returns of their unit trust funds. Sometimes, investors may have a reasonable idea about their expected returns over time, but tend to face difficulty in identifying their actual risk profiles. In such a situation, they can consult their unit trust consultants to assist in matching their risk profiles and financial goals with the appropriate unit trust funds. By being aware of their personal risk profiles, they would be prepared to accept the risk associated with the selected funds.
- Clear goal-based investing Investors need to set a clear goal when it comes to investing. There are three basic investment goals: a) to achieve growth, b) to receive regular income, and c) to preserve the capital value. After setting up appropriate goals, they should then find out what type of unit trust funds can fulfil these goals. In general, equity funds are managed to achieve capital gains, bond funds are managed to provide regular income while money market funds help investors to preserve capital while providing liquidity.
One of the biggest roadblocks to successful long-term investing is impatience. Investors need to remind themselves that unit trusts are for the long term. As such, gains made from investing in unit trusts may take some time to be realised. Impatient investors, in their quest to chase returns, may not give their investments enough time to perform adequately. Some investors view unit trusts like stock trading and attempt to time the market by moving in and out of their funds.
In contrast, unit trusts are more suitable for investors seeking reasonable long-term returns. Being prepared to hold on to their unit trust investment for at least five years or more enables their funds to reap reasonable returns as the companies invested by the funds have sufficient time to grow their profits.
CONCLUSION
Unit trust investments provide a good foundation for individual investors to fulfil their financial aspirations. However, investing in unit trusts with misconceptions and insufficient knowledge often leads to unnecessary disappointments for investors when their expectations are not met.
Holding their investments for a sufficiently long period, understanding risks and returns of their investments, as well as having a clear goal are positive steps towards achieving their financial objectives. Unit trust investments can be rewarding in the long run, requiring both their patience and confidence in the investment process. Investors need to understand the concept, benefits and limitations of unit trust investing before they invest in a particular fund. Therefore, it is advisable that investors strategise and plan ahead for their financial goals. In doing so, they can have the proper mindset for investing and be able to establish a realistic perspective of their investments.
Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes.
This article is prepared solely for educational and awareness purposes and should not be construed as an offer or a solicitation of an offer to purchase or subscribe to products offered by Public Mutual. No representation or warranty is made by Public Mutual, nor is there acceptance of any responsibility or liability as to the accuracy, completeness or correctness of the information contained herein.
