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Oran Hall Hands-off investing

Some people do not invest because they know little about investing or feel that they do not have enough money to do so, but there are others who have some knowledge and reasonable resources who choose not to because they do not have the time to do so.

There are several options for such individuals. They include mutual funds, unit trusts, index funds, and managed portfolios. In these cases, although the investor plays little to no role in the actual management of the portfolio, the individual has a decision-making role in terms of deciding the best vehicle to employ and, critically, which service provider to engage.

The truth is, these vehicles do not exist by themselves, and the providers have different approaches and strategies as well as reputations developed over the years, so the investor must make a decision about the best vehicle to use and the most suitable provider to engage.

Unit trusts and their very close relatives, mutual funds, are now quite well known in the Jamaican market. They advertise, and their performance reports are published in the media. Additionally, they use the worldwide web to publish what they do and how they can help investors.

Unit trusts and mutual funds are similar in the sense that they are pooled funds managed professionally for the benefit of investors. They are different in the sense that unit trusts are investment trusts, governed by a trust deed and a board of trustees and sell units to investors. Mutual funds, on the other hand, are investment companies that sell investment shares to investors.

The usefulness of these investment vehicles is that investors play no part in selecting the instruments the funds buy and sell or in any matter relating to the day-to-day running of the funds. Additionally, they offer a wide range of investment funds, or portfolios, to match the needs and objectives of each investor. Where one fund cannot do it, the investor may invest in more than one fund to satisfy the desired objectives as closely as possible.

Investors have a responsibility to familiarise themselves with the risks associated with each type of fund, the types of instruments in which they invest, and how suitable they are to their own needs. Oftentimes, the decision about the funds in which to invest and which provider to entrust with the responsibility to invest one’s money can be difficult.

Considering what the investor has at stake, it is each person’s responsibility to take some time to get some guidance in making such decisions. The attending investment professional can assist by providing information on the structure and composition of the funds and their suitability to the needs of the investor.

These instruments do not trade on the stock market but are available through the unit trusts and mutual funds and their agents.

Index funds are made up of several securities, stocks, and bonds, for example, and are designed to replicate the composition and performance of a given financial market index, so they trade on the stock market, for example. Although they may track a broad index, they may also track a smaller or more specialised index such as those linked to the sector funds on the Jamaica Stock Exchange.

Generally, index funds employ the passive investment style of management, so the managers make purchases and sales of securities to align with the market index that the funds track when the composition and weighting of the index changes. For example, stock market indices change due to the addition of new stocks, the removal of some stocks, and an increase or reduction in the issued shares of listed companies included in the index.

The advantages of index funds include their ability to increase in value over the long term, the benefit they give to the investor to invest in a diversified portfolio of securities by buying one security, the access they give small investors to a wide portfolio, their lower level of volatility relative to individual securities, and the ease of management they offer, which saves the investor time. These advantages also apply to unit trusts and mutual funds.

Some disadvantages of index funds are that they do not offer customisation to investors, the role of diversification in portfolio creation and management is limited, they do not outperform the indices they track, and management fees make them relatively costly.

Managed funds are generally offered by portfolio management companies, which build and manage portfolios for individuals and groups of individuals. They tend to customise portfolios for their clients and thus may require them to have more funds to invest than the vehicles I discussed earlier. There are some portfolio managers, though, that facilitate investors participating in pre-determined investment portfolios. While they open the door to small investors, they limit the scope for customisation. In addition to the expenses associated with the buying and selling of securities by the funds, investors pay management fees based on the value of the portfolios for the service provided to them.

Individuals who do not have the time or appetite for engaging in the active management of their portfolios do have some options, but the benefits come with some costs.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and

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