You will be able to explain that a fund unit is a share in many companies and where its return comes from.
Ask ten people what they own when they buy an ETF and you'll get answers like "a stock", "a product from the bank" or "something that tracks the market". Nadia's first answer was "a ticker on an app". None of these is wrong, but none would help her work out what could happen to her money.
Before you choose a fund, it's worth being clear about what a fund unit actually is, where its return comes from, and what owning many companies at once does and doesn't protect you from.
A fund collects money from many investors and uses it to buy a large set of investments on their behalf: shares, bonds or both. Each investor gets units, and each unit is an equal slice of everything the fund holds.
Picture a fund that holds 500 companies. When Nadia puts S$5,000 into it, she doesn't pick any of the 500. The fund's manager buys more of all of them, in the proportions the fund's rules set, and Nadia's units represent her share of the whole basket. If the fund has a thousand investors or a million, each unit has the same claim.
The fund's assets are usually held by a separate custodian or trustee, apart from the manager's own business. So the manager runs the fund, but the shares inside it don't belong to the manager. If you want the detail on how this works for unit trusts in Singapore, Unit trusts, robo-advisors and managed money compared covers it in lesson 1.1, A unit trust is a pool you own a slice of.
An ETF is a fund whose units trade on a stock exchange like a share. You buy and sell them through your broker during market hours. Module 4 covers how that works and how an ETF decides which companies to hold.
A fund's return has two sources.
The first is change in value. Every day the shares inside the fund are priced by the market. If the 500 companies are worth more this year than last, each unit is worth more. If they're worth less, each unit is worth less.
The second is income. Many of the companies pay dividends, and a fund collects them. Some funds pass the dividends on to you as cash, a few times a year. Others reinvest them inside the fund, so the unit price rises instead. Either way, the dividends are part of your return. Lesson 4.4, Read one ETF factsheet and find six facts, shows you how to tell which kind a fund is.
Costs come out of the return. Every fund charges a yearly fee for running it, taken from the fund's assets, so you never see a bill. Lesson 5.3 looks at why that fee matters over decades.
Holding many companies at once is called diversification. Its main job is to stop any one company from wrecking your result.
Here's a made-up comparison. Suppose Nadia put her S$5,000 into a single company's shares, and that company collapsed. She could lose most or all of the S$5,000. Now suppose she put it into a fund holding 500 companies in equal amounts, and one of those companies collapsed. That company is one 500th of the fund, so her loss would be S$10, or 0.2% of her money. In real funds the biggest companies take a larger slice, which lesson 4.1 explains, but the principle holds: a single failure becomes a small dent.
That protection is real and it's the main reason a fund makes a sensible first investment. You don't need to know which company will do well, and a bad pick can't sink you.
Diversification has a limit, and it's an important one. It spreads the risk of individual companies. It does nothing about the risk of the whole market falling at once.
When a recession hits, or a financial crisis, or a pandemic, most companies fall together. A fund holding 500 of them falls too. If the whole market drops 30%, Nadia's S$5,000 drops to about S$3,500, no matter how many companies she owns. This is why lesson 2.1 kept short-term money out of shares. Owning many companies made her safe from one company's failure. It didn't make her safe from a bad year.
Put the two together and you have a fair description of a broad fund. One company can't hurt you much. The market as a whole still can, for a while, and module 7 shows what that looks like in your own account.
Before you go on, try explaining a fund in plain words, the way you would to a friend who has never invested. If you can say what you'd own and what could make its value fall, you're ready for the exercise that follows.
Write two sentences in your own words explaining what you would own if you bought a fund that holds 500 companies.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).