Introduction to Fund Types
Investment Objectives
To achieve capital appreciation and a return higher than inflation over the long term
Investment Instruments
Stocks
Risk Level
Relatively high
Major Risks
- Stock market volatility and performance of individual stocks
- Fluctuation in exchange rates (if the fund invests in stocks traded in a foreign currency, the depreciation of that foreign currency will result in a drop in stock prices, leading to a drop in the price of the fund)
Fees & Charges
The fee is generally a percentage of the fund’s net asset value
Features
- Equity Funds are frequently described in terms of geographical allocation: those investing in a single market (e.g. Hong Kong Equity Fund), regional market (e.g. Asia Equity Fund) or global market.
- They invest mainly in stocks listed on stock exchanges approved by the MPFA.
Potential Suitability
Young scheme members with a longer investment horizon and a higher risk tolerance level. They also include other scheme members who are risk tolerant
Points to Note before Investing
- You should examine your risk tolerance level, the characteristics and risk level of the various funds, and the risk and return relationship of the funds
- The risk level of different Equity Funds, which invest in different stock markets, can vary considerably
What is an Index Fund?
An Index Fund is a passively managed fund. Its investment objectives are to track the performance of the reference indices. Investment managers of Index Funds generally make investments with reference to the constituent stocks of the relevant index and market allocation, so that the performance of the fund is similar to that of the reference index. The fees for passively managed funds are generally lower than for other funds.
Why does the performance of Hang Seng Index (HSI) Tracking Funds not follow the movement of the HSI?
Although the investment objective of HSI Tracking Funds is to match as closely as practicable the performance of the HSI, there can be no assurance that their performance will on each valuation day track or be identical to the HSI. Some of the reasons are set out below:
- Fees and expenses are payable out of the assets of the HSI Tracking Funds, but the HSI does not reflect such fees and expenses.
- Transaction fees and stamp duty will be incurred in adjusting the composition of the investment portfolio of the HSI Tracking Funds following changes in the composition and weighting of the constituent stocks of the HSI.
- When there are changes in the composition or weighting of the constituent stocks of the HSI, there may be timing differences between the changes in the HSI and the corresponding adjustment to the investment portfolio of the HSI fund.
- HSI tracking fund holds cash to meet the redemption/switching requirements of members, which leads to tracking errors.
Investment Objectives
To achieve capital appreciation over the long term through investing in a combination of stocks and bonds
Investment Instruments
A mix of stocks and bonds
Risk Level
Medium to high, depending on the relative weight of different assets in the investment portfolio. In general, a greater proportion in stocks is associated with a higher level of risk
Major Risks
- Stock market volatility and performance of individual stocks
- Fluctuation in exchange rates (if the fund invests in stocks and bonds traded in a foreign currency, the depreciation of that foreign currency will result in a drop in the prices of the stocks and bonds, leading to a drop in the price of the fund)
- Fluctuation in interest rates (when interest rates rise, bond prices may drop and result in a drop in the fund price)
- Credit ratings of bonds (if the fund has invested in a bond whose credit rating is downgraded, the bond price will normally drop, which may lead to a drop in the price of the fund)
Fees & Charges
The fee is generally a percentage of the fund’s net asset value
Features
- Mixed Assets Funds are also known as Stable Fund, Balanced Funds, Life-Cycle Fund, Growth Fund
- Different Mixed Assets Funds have different proportions of stocks and bonds. In general, a greater proportion in stocks is associated with a higher level of risk. Labelling the fund “balanced” does not necessarily imply a 50-50 split between stocks and bonds in the fund’s assets
- Some trustees also offer Target Date Funds, Life-Cycle Funds or asset rebalancing services to help scheme members adjust the proportion of various funds in their portfolios at different life stages
Potential Suitability
Scheme members may adjust the proportion of stocks to bonds in their portfolios at different life stages. Generally, younger scheme members have a longer investment horizon, so they have a higher risk tolerance level. They may invest in a portfolio with a higher proportion in stocks in order to achieve a higher potential returns
Points to Note before Investing
- You should examine your risk tolerance level, the characteristics and risk level of the various funds, and the risk and return relationship of the funds
- As your risk tolerance level will change at different life stages, you should assess whether the proportion of stocks and bonds in the Mixed Assets Fund that you intend to invest in suits your investment needs
Investment Objectives
To earn a stable income from interest and bond coupon rates, and make a profit from bond trading
Investment Instruments
Bonds
Risk Level
Low to medium
Major Risks
- Fluctuation in interest rates (when interest rates rise, bond prices may drop and result in a drop in the fund price)
- Fluctuation in exchange rates (if the fund invests in bonds traded in a foreign currency, the depreciation of that foreign currency will cause a drop in the bond price, which will lead to a drop in the price of the fund.)
- Bond credit ratings (if the fund has invested in a bond whose credit rating is downgraded, the bond price will normally drop, which will lead to a drop in the price of the fund.)
Fees & Charges
The fee is generally a percentage of the fund’s net asset value
Features
A Bond Fund invests in bonds or debt instruments issued by governments, public organizations, banks, commercial organizations or supranational agencies (e.g. the World Bank). The acquired bonds must meet the minimum credit rating or listing requirements stipulated in the MPF legislation
Potential Suitability
Moderately conservative scheme members with a low-risk appetite, and those seeking a stable return over the medium-to-long term
Points to Note before Investing
- You should examine your risk tolerance level, the characteristics and risk level of the various funds, and the risk and return relationship of the funds
- You should pay attention to the market in which the Bond Fund invests
Investment Objectives
To provide a guarantee on the capital invested, or to achieve a guaranteed rate of return
Investment Instruments
Bonds, stocks, or short-term, interest-bearing money market instruments
Risk Level
Relatively low (but it also depends on whether the guarantee conditions can be met when the MPF is withdrawn)
Major Risks
The credit risk of the related insurance company (if invest in Guaranteed Fund that invests solely in a fund in the form of an insurance policy)
Fees & Charges
Apart from managements fees, a guarantee charge is usually charged for providing such a guarantee
Features
- There are two major types of guarantees: capital guarantee or return guarantee
- Most Guaranteed Funds in the MPF market offer conditional guarantees, which require fulfilment of a set of conditions in order to enjoy the guarantee, while an unconditional guarantee is provided without any conditions imposed
- You must read the terms and conditions of the individual fund carefully, such as the following:
-holding the fund for a minimum period:Scheme members must commit to invest in the fund for a minimum period. If scheme members switch to another fund or if scheme members’ employers switch to another MPF scheme during this period, the guarantee will become void. Let’s say, for example, you have a Guaranteed Fund that provides a guaranteed rate of return of 2% per annum, with a minimum investment period of five years. If you switch to another fund after only three years, the guaranteed rate of return will not be applicable. Your payout depends on the actual performance of the fund at the time of withdrawal, not the guaranteed rate of return-Withdrawal requirement:Scheme members can get the guaranteed return only when their withdrawals are made under the specified conditions: for instance, after holding the fund for at least the minimum period (e.g. three years or above), making a minimum number of contributions (e.g. 90 contributions), the last contribution having been made some years previously (e.g. five years or more), reaching the age of 65, or otherwise meeting the legal requirements for withdrawal of MPF (e.g. early retirement)
Potential Suitability
Risk averse scheme members, especially those close to retirement who are willing to abide by the guarantee conditions
Points to Note before Investing
- You should examine your risk tolerance level, the characteristics and risk level of the various funds, and the risk and return relationship of the funds
- You should read the terms and conditions of the MPF Scheme Brochure very carefully, in particular the potential risks and guarantee conditions
- You should understand whether a capital guarantee or return guarantee is provided, and assess whether you can fulfil the relevant guarantee conditions before investing
Investment Objectives
To earn a rate of return similar to the Hong Kong Dollar savings rate
Investment Instruments
Hong Kong dollar denominated short-term bank deposits and short-term bonds
Risk Level
Relatively low
Major Risks
Fluctuation in interest rates (when interest rates rise, bond prices may drop, and result in a drop in the fund price)
Fees & Charges
- If the return of an MPF Conservative Fund in a particular month is lower than or equal to the MPFA's Prescribed Savings Rate (PSR) for that month, no administrative expenses can be charged by trustees. However, if the returns of an MPF Conservative Fund exceeds the PSR in any one of the following 12 months, trustees can recoup uncollected administrative expenses to the extent of the excess returns.
Features
- The law requires that all MPF schemes offer an MPF Conservative Fund
- An MPF Conservative Fund is a type of money market fund. Even though it is considered a low-risk investment product, it is not principal-protected and the return may not beat inflation and may even be negative
Potential Suitability
Conservative, risk averse scheme members, especially those close to retirement
Points to Note before Investing
- You should examine your risk tolerance level, the characteristics and risk level of the various funds, and the risk and return relationship of the funds
- You should consider whether MPF Conservative Funds are too conservative with respect to your investment objectives
Investment Objectives
To earn a rate of return similar to short-term savings rate or stable income from interest or bond coupon rates
Investment Instruments
Short-term, high quality interest bearing securities (e.g. short-term certificates of deposit, government papers or commercial papers)
Risk Level
Relatively low
Major Risks
- Fluctuation in interest rates (when interest rates rise, bond prices may drop, and result in a drop in the fund price)
- Fluctuation in exchange rates (if the fund invests in bonds traded in a foreign currency, the depreciation of that foreign currency will cause a drop in the bond price, which will lead to a drop in the price of the fund)
Fees & Charges
The fee is generally a percentage of the fund’s net asset value
Features
Money Market Funds are low-risk funds, but they are not principal-protected and the return may not beat inflation and may even be negative
Potential Suitability
Conservative, risk averse scheme members, especially thoseclose to retirement
Points to Note before Investing
- You should examine your risk tolerance level, the characteristics and risk level of the various funds, and the risk and return relationship of the funds
- You should consider whether the funds are too conservative with respect to your investment objectives