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 With a deluge of investment
products available to investors, it is not uncommon to see many investment companies
trying to capture a market share with their glossy and colorful prospectus and various
forms of advertising.
In the investment market, strategic advertising can help paint a very attractive
picture. Novice investors are easily mislead into thinking that all the products
are equally attractive. Where investments are concerned, one mistake can have a long
lasting negative impact on your financial security.
Everyone agrees that one should not only look at the glossy attractive layouts, colorful
photos and jazzy bar charts of the prospectus or brochure. But how do investors untangle
the hype from reality? Apart from enjoying the glossies, what are the things that
you should be aware of or look for when flipping through a fund catalog?
Rather than being overwhelmed by the glossies, focus instead on the details when
reading a prospectus. A prospectus normally gives investors some insight about a
particular investment product. It contains useful details such as the background
of the fund manager and their investment objective, the company's philosophy, investment
strategies, risks and rewards, investors' rights, fees and charges, minimum investment,
etc.
Prospectus are normally regulated under the jurisdiction of the country the investment
was established. To ensure transparency, the regulation requires that minimum disclosure
standards are met so that investors are properly informed before investing.
Companies seeking admission to the Official List of the Exchange, whether through
a public issue, offer for sale or introduction, must issue a prospectus which must,
in addition to complying with the prospectus requirements of the Companies Act, 1965
comply with the prospectus requirements of the Exchange.
Some investments provide similar information in a brochure format. Investors are
recommended not to complete any investment application form unless it is contained
in or attached to a prospectus or valid offer document. First-timers should read
carefully the prospectus before investing.
You will have to pay a certain amount of fees and expenses when investing in something
regardless of whether it is a good or bad investment. When comparing investments,
investors should check the cost although it seems rather hard to compare the cost
of investing in different types of securities as some fee structures are more complex
and potentially confusing.
Some investments charge up-front fees in addition to performance fees, management
fees, trustee fees, and etc. Some investments which offer better services may decide
to charge more. Charges for some foreign investments also differ widely from local
investments.
To attract investors, investment companies that charge higher fees compensate investors
with attractive features such as "free-consultation" or "free handbook".
If an investment claims to charge only minimal fees, find out the details first.
Historical returns claimed by some managers look indeed impressive. However, there
is no guarantee that today's top performer will not slip down the ladder tomorrow.
Past performance may be a useful indicator but it may not necessarily be a reliable
guide to future performance.
Performance is influenced by many factors such as economic and political variables.
Who could have avoided the crisis which swept across the region last year despite
the beautiful picture painted by the experts at the beginning of last year?
Amazingly, the sharp downturn in most stockmarkets has even exceeded the super bears'
expectations. Investors should not be overwhelmed by the impressive historical gains
printed in the prospectus.
Study the statistics carefully. Check how the comparison are made. If a company claims
to have achieved remarkable returns, it may be nothing special if the performance
was over a boom period such as 1993. In that instance, similar investments could
have recorded similar or even better returns. In other words, the company's claim
is not so spectacular after all. Theirs was not the only one who outperform the market
benchmark over the period.
If the company has made profit forecasts and projections, analyze the figures to
determine if the projections are realistic. Determine whether it has taken into account
the country's economic growth and other external factors in their projections. In
other words, study beyond what is claimed especially if you find such claims "tricky".
Quite often some companies claim to be able to achieve spectacular returns over a
period of time by comparing their performance against a market benchmark. However,
it is meaningless to compare the performance of a stock against the market fixed
interest rates or comparing a bond fund performance against the stock market index.
Generally, over a period of time, it is reasonable to expect a higher rate of return
from stock investments than from fixed deposits. Stocks which involve higher risk
compensate investors with higher returns while interest from your bank accounts are
relatively fixed.
The same applies to a bond investment which is more conservative in nature and should
not be compared to a stock benchmark. In short, a stock investment which claims to
have beaten what investors can get from fixed deposits over a longer period is simply
misleading.
Material differences between the subjects of comparison should be highlighted. Comparison
should be based on reports published by independent organizations or be independently
commissioned. Any external sources of such material must be identified.
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