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INVESTMENT KNOWLEDGE
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What is
a fund?
The money of many investors from worldwide are pooled into one large fund, which is then
divided into shares, or units. This enables investors to diversify their
investment vehicles such as securities, bonds, warrants, derivatives and currencies, etc.
Funds are managed by professional fund managers. Different funds have varying
levels of risk and return, and thus investors can choose the level to suit their own
investment goals.
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What are the benefits of funds?
Minimize Risk
With funds, you can spread your investments across a range of sectors, in different
countries,with different levels of risk.
Professionally Managed
Fund managers have access to information and research statistics produced by economists
and analysts around the world. They are ideally positioned to identify investment
opportunities.
Easy Access to Worldwide Markets
Your money can be invested in local and also overseas markets which are not easily
accessible to individual investors. Also you can balance your portfolio with a
mixture of investment vehicles.
Lower Fees
A large number of investors participate in each fund, and operating costs are shared
among all the investors. Economies of scale are thus achieved.
Secure Investment
Your investment is safe since assets are held by the trustees who operate independently
from fund managers, and who are also registered offshore.
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How many types of funds are there?
Funds can be broadly classified into stock funds, bond funds, currency funds,
managed funds, deposit funds, hedging funds, specialist funds, warranty funds, guarantee
funds, etc. Depending on the markets they invest, the funds can also be sub-divided
geographically into global, regional (e.g. Europe, Asia, Pacific) or single country (e.g.
USA, Japan, China, etc) categories.
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What funds should I pick?
It always depends. If you are risky enough to opt for a higher return,
single market funds or even hedging funds will suit your need. If you want to be
safe, global or regional funds will be your choice.
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Why shouldn't I buy stocks
rather than stock funds?
Just ask yourself one question. "How can I get access to Japanese
stocks?" One can enter into the Japanese market by buying a Japan Fund.
Another good point is that it diversifies investment through investing in multiple stocks
or even multiple markets. (e.g. Korea and Thailand at the same time)
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What
is volatility?
Volatility is simply the extent to which the returns of fund fluctuate, i.e.
price fluctuation and it is often used as an indicator for risk. That means the
higher the volatility, the higher the risk.
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What is a typically conservative
portfolio?
A conservative portfolio would not be one highly exposed to equity funds.
Bond funds generally give stable return to investors and should be a major component of
the total portfolio, say 60% bond fund and 40% equity fund.
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What is a typically balanced portfolio?
Normally, a balanced portfolio would spilt equally between bond and equity funds.
The concerns about volatility and return are then balanced.
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What is a typically aggressive portfolio?
Equity funds are more volatile than bonds, and in the long term, often produce
higher returns. Therefore, an aggressive portfolio generally includes more equity
funds, say 60% equity funds and 40% bond funds.
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What are the advantages of regular
savings?
When you save regularly, you ride out the fluctuations in the market and that
gives you peace of mind. There is no longer the need to try and time the
market as when you make a lump sum investment. When prices drop, you take advantage
of the market and buy more units for your investment. And when they rise, these
additional units then transform into greater capital gains. Your average purchase
price is going to be less than the average unit price. This is what we call
"Dollar Cost Averaging": a medium to long term savings strategy based on
constant buying and take advantage of the fluctuations to make investment work harder for
you.
Example: |
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| ¡@ |
Save |
Unit
Price |
Units
Purchased |
| ¡@ |
$6 |
$1 |
6 units |
| ¡@ |
$6 |
$2 |
3 units |
| ¡@ |
$6 |
$3 |
2 units |
Total: |
$18 |
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11 units |
Thus, average purchase price = $18/11
units = $1.636 per unit.
But average units price is $(1+2+3)/3 = $2.
Conclusion: Average purchase price is less than average unit price.
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What is the cost of delay?
Maintaining your standard of living in the future should be a key objective.
However, delaying the saving process can have a dramatic effect to your retirement living,
education plan, etc. The longer you delay starting to save, the higher the
contributions/installments required to achieve a particular lump sum.
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What is
bond?
Much like people, large organizations such as the governments and the big
corporations, all need to borrow money occasionally. Bonds are form of indebtedness
that is sold to the public in set increments. In return for lending the money to the
debtor, the lender gets a piece of paper (i.e. bond) that stipulates how much was lent,
the agreed-upon interest rate, how often interest will be paid, and the years term
(maturity date) of the lending.
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What is par value of bond?
Par value is the amount of money the investor will receive once the bond matures,
meaning that the entity that sold the bond will return to the investor the original amount
that it was lent, called the principal.
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What is coupon rate of bond?
The coupon rate is the amount of interest that the bond holder will receive
expressed as a percentage of the par value. Thus, if a bond has a par value of $1000
and a coupon rate of 10%, the person holding the bond will receive $100 a year.
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How to calculate bond yield?
You can calculate the bond yield by dividing the amount of interest it will pay
over the course of a year by the CURRENT PRICE of bond. If a bond that cost $1000
pays $75 a year in interest, then its current yield = $75/$1000 = 7.5%.
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Why bond yield can differ
from coupon rate?
Bond price fluctuates as interest rates change, so a bond can trade above or below the par
value based on what interest rates are. If you sell the bond before it
matures, you will have to sell it at the market price, which may be above or below par
value. So the bond yield will change and thus bond yield will differ from coupon
rate.
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What
is the close relationship among bond price, bond yield and interest rate?
When the interest rate increases, bond prices usually move down and thus the bond
yield will be increased. On the other hand, if the interest rate decrease, bond
price will often go up; hence, the bond yield will be decreased.
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Why invest in bond funds?
Capital Return
In an interest rate downtrend, bond prices usually go up. At times of low interest
rates and deflation, you may gain from potential capital appreciation with your bond fund
investment.
Interest Return
Like other fixed income instruments, bonds usually pay interest at regular intervals.
You may therefore increase your return with interest earnings from your bond investment.
More Stable
As bond prices are historically less volatile than equities, your investments may be more
stable if some of your money is invested in bonds. Mix with bond funds, equity funds
in your portfolio, you may moderate the impact of a sudden fall in any one type of your
investment.
Just Required a Small Lump Sum
Investing directly in bond markets would require huge sums of money. But with bond
funds, all you need is to invest small amount of money and you can enjoy the long-term
growth potential of bond funds and also get the benefits of professional investment
management.
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What is Mandatory Provident Fund (MPF)?
The primary objective of the Mandatory Provident Fund (MPF) is to provide a basic
retirement benefit for all workers in Hong Kong. Faced with an aging population, the
Government thus believes that universal retirement benefits should be provided.
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What does the MPF scheme cover?
All employees aged between 18 and 65 are included in an MPF scheme 60 days after
joining a company. Besides, self-employed people will be also required to contribute
to the scheme.
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Who is not cover by the MPF system?
Self-employed hawkers, domestic workers, civil servants and expatriates who work
in Hong Kong for less than one year or are covered by a home country scheme.
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What are the contribution levels
for MPF?
Employee's Monthly Income |
Employer's
Contribution |
Employee's
Contribution |
Self-Employed
Person's Contribution |
| Less
than HK$4,000 |
5% |
Optional |
Optional |
| HK$4,001
to HK$20,000 |
5% |
5% |
5% |
| Over
HK$20,000 |
5% on the HK$20,000,
voluntary on any additional |
5% on the HK$20,000,
voluntary on any additional |
5% on the HK$20,000,
voluntary on any additional |
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When can you get your MPF benefits?
An employee cannot receive MPF benefits before reaching the age of 65.
There are a few exceptions:
* On early retirement, between the ages of 60 and 64
* Upon permanent departure from Hong Kong
* As a result of total disability
* Upon Death (payment to the deceased's personal representative will be free from
estate duty)
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What to do with existing retirement
scheme?
Some employers may have already set up voluntary schemes for their employees
under the Occupational Retirement Schemes Ordinance (ORSO). ORSO registered schemes
established on or before 15 October 1995 will be allowed to continue, although employers
may have to make modifications and meet certain conditions. The employer will still
need to offer the employees an one-off opportunity to convert to an MPF scheme, or remain
in the current ORSO scheme. If the ORSO scheme was established after 15 October
1995, the scheme will not be exempted and the employer is needed to set up an MPF scheme
for the employees.
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What are the benefits for
the employers under the MPF?
* MPF contributions can be considered part of the employer's operating
expanses, thereby resulting in lower profits tax liability.
* MPF contributions can offset long-service or severance payments.
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What are the benefits for
the employees under the MPF?
* MPF contributions are tax deductible and declared investment returns are
tax-free.
* All employer contributions will fully and immediately belong to the employee's MPF
account.
* If a employee changes job, he/she can choose to have the accumulated amount
transferred to the new employer's scheme or held over in the old employer' scheme to
continue earning investment returns or transferred to a nominated account in an MPF
scheme.
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