Thursday, June 21, 2007

Unit Trust (Part 4)

In this final part of my Unit Trust Series, I want to share my Methodology in Funds Selection.

Step 1: Knows your objective
* Capital Preservation = Lower Risk / More Bonds and Money Market component / Diversified Portfolio / More Defensive Funds
* Wealth Accumulation = Higher Risk / More Equities component / Can have more narrow focused funds

Step 2: Asset Allocation
* Decide % of equities and bonds you want in your portfolio
* Set aside some for liquidity such as Money Market, Cash Fund or Fixed Deposits

Step 3: Select Regions / Sectors / Countries
a) Identify Core Portfolio ~ 60% - 70% that mirrors the world indexes.
b) Identify Speculative Portfolio ~ 30% that focused into Countries, industries, sectors, etc
c) Identify Emergency portfolio ~ 0% - 10% to top-up in event of major market corrections. Can park in Cash or Money Market Funds

Step 4: Select the Individual Funds
* Once you select the regions, sectors, etc, you can identify funds based on
a) Reliable Historical Returns over 1, 3 and 5 yrs - Compare Peer Funds, Sharpe Ratio, etc
b) Reputable Investment Management
c) Funds which are Large and Diversified
d) Low Expenses Ratio

Step 5: Rebalancing
* Monitor and rebalance your funds periodically. Special scenerio calls might be made to reallocate assets and regions if necessary.

Funds selection is a delicate, yet complicating process which involves some level of skills and judgement. If you are not sure how to do it, you can also choose a simple option
* Buy into a Well Diversified Global Balanced funds with good track record and reliable managers.

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