ETFs

Let me take this entry to talk about Exchange Traded Funds (ETFs).

ETFs essentially peg themselves to the market index of the particular market and are actually made up of a basket of selected stocks. In other words, the ETF of a market is somewhat similar to a unit trust in terms of structure. Your broker would tell you, invest $200 a month in Unit Trust A and I'll use my expertise to gather returns from Company B based in Country C and Company D in Country E. You get the idea.

Unit trusts are necessarily more diverse, and you normally hear brokers raving on and on about how their funds are located across the globe. But how many people who buy mutual funds actually know and understand the companies their money is being put into? Personally, I wouldn't allow someone else manage my capital without truly having understanding and control (I shall elaborate later) over any fund.

The S&P 500 index in the US market for example, achieves an annual compounding return of about 12% over the long term. A mutual fund tagging companies around the world could earn more, but there is a significant chance of earning less either.

Of course, there are plenty of funds in the market that basically 'buy' the index, which begs the question of why anyone would choose to invest in an index fund rather than an ETF. Afterall, a mutual fund has higher management fees, as you are hiring someone professional to manage your funds on a regular basis, with all the paperwork thrown in. More importantly, an ETF, which comes in the form of a regular stock counter in the market, provides full control over when you can buy or sell, so long as there is a buy demand for the stock. This is different from mutual funds, which normally requires a minimum holding period and a longer process of redeeming your capital and returns.

Liquidity is key, and you want to have sufficient capital at any point of time to move from a less valuable asset class to another, or simply from one equity to the next.