Dear Sven,
I read one of your previous articles where you explained the potential benefits and pitfalls of buying stocks on the Vietnamese stock exchanges. You mentioned a few companies that could potentially produce attractive returns for investors. I am a novice investor and do not have the time to manage a portfolio of stocks myself. I am also afraid that holding individual stocks might not diversify my investment portfolio sufficiently according to my risk profile (I don’t like taking too much risk), and would leave me prone to experiencing losses that I would like to avoid. I have read that mutual funds and ETFs give beginners easier, less risky access to financial markets. Could you explain a bit more about these, and which options I could potentially access locally and internationally?
Your question is very relevant to anyone with any form of investable capital available to them, as mutual funds and ETFs (exchange traded funds) have become extremely popular options for investors looking for a destination to park their savings.
Mutual funds and ETFs are collective investment vehicles. In the days before collective investment vehicles, individuals would access financial markets mainly through a stockbroker, and hold a few individual stocks which a broker would sell to them without any consideration for their risk profiles or return objectives. This led to a market situation where too many individual, unsophisticated investors participated directly in the market, trading mainly on rumors and speculation, leading to asset bubbles and subsequent market collapses like the Wall Street crash of 1929.
A mutual fund is set up by a group of professional investors who agree to buy company stocks or any other investable securities according to a strict set of rules. The rules dictate the level of risk the manager will be able to take on the investment portfolio, and the type of securities they will be able to buy. Mutual funds will usually comprise of securities purchased using capital provided by those who manage the fund, and the fund will also be open to the public to allow outside investors to purchase a share of the fund, and enjoy a proportion of the returns which are experienced.
You can buy shares or “units” in local funds which invest in Vietnamese stocks and bonds. A great option is the Vietnam Equity Fund managed by Dragon Capital. This fund is UCITS compliant, meaning it conforms to European regulatory and disclosure standards. You can buy units directly through the company.
If you would like to buy shares or units of funds internationally, you can do so through platforms such as assurance wrappers or fund supermarkets, available from your independent financial adviser.
ETFs operate in the same manner that mutual funds do, however instead of investors buying units or shares from the company that operates the fund, shares of the fund trade publicly on a stock exchange just like any company share. The price of an ETF share is therefore subject to the laws of supply and demand, whereas the price of mutual fund shares is directly related to the value of assets held in the fund. For example, you could find a situation where the assets currently held in the ETF have a relatively high value, however if other investors believe that the price of these assets will fall in the future, this will have a negative impact on the current price of an ETF share. When it comes to a mutual fund, if the assets currently held in a fund have a relatively high value, the value of one share in the fund will be proportionately high.
An example of a locally-listed ETF is the SSIAM HNX 30 managed by Saigon Securities. The fund aims to track the performance of the 30 biggest companies listed in Hanoi. You will often find that many mutual funds will hold ETFs in their portfolios.
Mutual funds and ETFs are fantastic options for novice, and even experienced investors to save and compound wealth over the mid to long-term. However, as with any investment it is important to do research and conduct necessary due diligence on the specific aspects of a fund before investing. Obtaining research from third party sources to assess the experience of the fund manager, strategy, investment holdings and historical risk-adjusted returns are critical when choosing a fund.
BIO: Sven Roering is a partner and financial planner at Total Wealth Management PTE. Ltd. He holds an Economics Degree from Rhodes University in South Africa, and is a candidate in the Chartered Financial Analyst (CFA) program, having successfully completed level 1 and is currently working towards the level 2 exam.
