Investing can be a great way to make some extra cash, a way to make your spare money work for you, but it’s not for everybody. If you don’t have a vast knowledge of the business world, economics or investing then the risks of investing independently can be quite high, which is why a popular route into this sector for novices is to invest in an ETF.
What is an ETF?
ETF stands for exchange-traded fund, which we can liken to a group investment plan. Strangers commit to making a monthly payment into a fund which buys stocks and bonds etc and manages everything – sharing the risks and the profits between them. Crucially, an ETF tends to track an index rather than making direct investments.
Let’s look at an example – the Straits Times Index ETF
The ETF works by tracking an index, and the Straits Times Index ETF is one of two ETF’s available in Singapore. The Strait Times Index (STI) monitors the top 30 Singapore Stock Exchange listed companies, and their performance influences the index used to buy investments on behalf of the ETF.
It sounds easy enough, right? Simple pop a little cash over regularly and enjoy watching your balance swell with profit, but is it really that straightforward?
Here are some things you really need to know before you invest in the Straits Times Index ETF
You don’t need to join a monthly investment plan
That may be the most common approach but it is possible to open an account with a brokerage firm and operate that way.
Monthly investment plans are good for smaller investments
It’s fine to get started with say S$100 per month
The Straits Times Index ETF is good for passive and novice investors
You don’t need specialist knowledge of stocks and shares, and you don’t need to learn either. In fact, you have to do very little apart from transfer your cash and keep an eye on how things are going. Still, if you’d like to learn something useful take a look at the drwealth guide.
It’s a convenient way to diversify with a small investment
Even if you love investing in individual shares you can easily throw a few dollars at a Straits Times Index ETF account for a piece of the action in a wider range of stocks than you could do on your own for the same budget.
The management fees are attractive
Unlike investment funds which can carry quite a hefty fee charged by experienced fund managers, this ETF is very much cheaper, and obviously make a huge difference to the profits made, especially over a period of several years.
The Straits Times Index ETF may not be diverse enough
It may feature 30 companies but 40% of the index you are investing in is taken up with three companies – all local banks, leaving 36 others to share the remaining 60%. That isn’t necessarily a problem, unless the Singapore bank scene nosedives, of course! To be honest the entire index is all quite Singapore-centric.