Fund Investment Basics: A Comprehensive Guide for Hong Kong Investors

Investing in funds is the first step into the world of wealth management for many investors. Compared to directly buying individual stocks, fund investment pools capital from many investors and entrusts it to professional fund managers, helping to diversify risk and lower the barrier to entry. According to the Hong Kong Investment Funds Association, the Securities and Futures Commission (SFC) has approved the sale of over 2,000 funds locally, offering a wide range of options for investors. Whether you are saving for retirement, building up an education fund for your children, or simply want to grow your capital and outpace inflation, understanding the basics of fund investing is essential for achieving your long-term financial goals. This comprehensive guide for Hong Kong investors will introduce you to fund investing, covering definitions, categories, advantages, and strategies to help you build a solid investment portfolio.

What is Fund Investment

A fund—also known as a "Mutual Fund" or "Unit Trust"—is a type of collective investment vehicle. In simple terms, a fund aggregates the money of many investors and is managed by professional fund managers and their teams, who invest the assets into various financial instruments such as stocks, bonds, money market instruments, or Real Estate Investment Trusts (REITs).

When you buy a fund, you are actually purchasing "units" of the fund, each unit representing your share of the fund’s total assets. The value of the fund fluctuates with the market performance of its underlying assets. This is usually reflected as the "Net Asset Value" (NAV) of the fund. The NAV per unit is calculated by subtracting liabilities from total assets, then dividing by the total number of units issued.

The core principles of fund investment are "professional management" and "risk diversification." Fund managers conduct in-depth market research and analysis according to the fund's stated objectives and strategies when selecting investments. At the same time, because funds often invest in dozens or even hundreds of different assets, overall portfolio risk can be effectively managed even if some assets underperform.

Main Categories of Funds

There is a wide variety of funds on the Hong Kong market. Understanding the characteristics of different fund types will help you choose an investment vehicle that matches your needs.

Equity Funds

Equity funds primarily invest in shares of listed companies, with the goal of achieving long-term capital growth. These funds can be categorized by region—such as Hong Kong equity funds, US equity funds, Asian equity funds, or global equity funds—or by sector, such as technology funds, healthcare funds, or financial funds.

Equity funds generally offer higher potential returns but with increased volatility, so they are considered higher-risk investments. They are best suited for investors with a longer investment horizon and higher risk tolerance.

Bond Funds

Bond funds mainly invest in government or corporate bonds and earn returns from bond interest payments. Bond funds are usually less risky than equity funds, with milder price fluctuations, making them suitable for investors seeking stable income and with a lower risk appetite.

Bond funds can be further divided into government bond funds, investment grade corporate bond funds, and high-yield bond funds (commonly called "junk bonds"). Each type has its own risk and return profile, so investors should choose based on their personal circumstances.

Mixed Asset Funds

Mixed asset funds invest in both equities and bonds, aiming to balance risk and return. Fund managers adjust the allocation ratio between stocks and bonds in response to changing market conditions.

These funds are ideal for investors who want the growth potential of equities but also want to use the stable returns of bonds to reduce overall risk. The risk and return level of mixed asset funds usually falls between those of equity and bond funds.

Money Market Funds

Money market funds invest in short-term, highly liquid money market instruments such as short-term government bonds, certificates of deposit, and commercial paper. The main features of these funds are low risk and high liquidity, making them suitable as cash management tools or a place to park funds temporarily.

However, money market funds tend to generate relatively low returns and may not keep up with inflation over the long term, so they are not suitable as long-term investment vehicles.

Index Funds and Exchange-Traded Funds (ETF)

Index funds aim to track the performance of a specific market index, such as the Hang Seng Index or the S&P 500. These funds use a passive management strategy, following the index’s constituent weights rather than actively picking stocks.

Exchange-Traded Funds (ETFs) are similar to index funds but can be bought and sold on exchanges like stocks, providing greater trading flexibility. Because their management fees are typically lower than actively managed funds, ETFs are increasingly popular with cost-conscious investors. Longbridge Securities offers ETF trading services for the Hong Kong and US markets, allowing investors to participate in global index investment.

Main Advantages of Fund Investing

Fund investing is very popular in Hong Kong, largely because of the following features.

Professional Management

Funds are managed by experienced fund managers and teams who have in-depth market knowledge and analytical skills to conduct comprehensive research and make investment decisions. For investors who lack time or expertise, leaving investment management to professionals can reduce the burden of picking individual stocks, though it does not guarantee higher returns.

Risk Diversification

Funds typically invest in a range of different assets, and this diversification strategy effectively reduces the impact that volatility in any single asset can have on the overall portfolio. As the saying goes, "Don’t put all your eggs in one basket"—fund investment is an ideal way to practice this principle.

Low Threshold

Compared to directly investing in stocks or bonds—which requires larger sums to achieve meaningful diversification—fund investment offers a relatively low entry threshold. Many funds have minimum investment amounts as low as a few thousand to ten thousand HKD, while some monthly investment plans require only a few hundred HKD per month. This makes fund investment accessible to investors with varying amounts of capital.

Liquidity

Most open-ended funds allow investors to subscribe for or redeem units at any time, providing good liquidity. While it may take a few business days to receive funds after redemption, this is still more flexible than many other investment instruments.

Transparency

Fund companies are required to regularly disclose key information such as fund holdings, performance, and fees, giving investors a clear picture of their investment status. In Hong Kong, fund managers are regulated by the SFC and must comply with strict disclosure requirements, further protecting investors.

Risks and Returns of Fund Investing

Understanding the relationship between risk and return is crucial for successful investing. While fund investing is generally less risky than investing in individual stocks, there are still several types of risk to consider.

Market Risk

Market risk refers to the risk that the value of a fund will drop due to changes in the overall economic environment or market sentiment. For instance, economic recessions, geopolitical tensions, and pandemics can all lead to significant market volatility and impact fund performance. Equity funds are typically more sensitive to market risk than bond funds.

Interest Rate Risk

Interest rate fluctuations have a particularly significant effect on bond funds. When market interest rates rise, the value of existing bonds falls, as newly issued bonds offer higher yields, making older bonds less attractive. Therefore, investors in bond funds need to pay attention to central bank monetary policies.

Currency Risk

If a fund invests in overseas assets, currency fluctuations can affect returns. For example, even if the US stock market performs well, if the HKD strengthens against the USD, returns of US equity funds denominated in HKD may be negatively affected. Consider currency hedging when investing in overseas funds.

Credit Risk

Another key risk for bond funds is credit risk—the risk that bond issuers may fail to make timely payments of interest or principal. High-yield bond funds provide higher interest income but carry a greater risk of default, so investors should evaluate this risk carefully.

Liquidity Risk

Although most funds offer good liquidity, under extreme market conditions, fund companies may temporarily suspend redemptions or delay payments. Liquidity risk tends to be higher in smaller or niche-market funds.

Important Note: Generally, funds with higher expected returns also carry higher investment risk. Choose funds based on your personal risk tolerance, investment objectives, and investment horizon.

How to Choose the Right Fund

With so many fund products on the market, choosing the right fund involves consideration of several factors.

Define Your Investment Goals

First, be clear about your investment objectives. Are you saving for retirement, building an education fund for your children, or accumulating money for a house purchase in the short term? Different goals correspond to different time horizons and risk tolerance, which in turn shape your fund selection.

Assess Your Risk Tolerance

It’s important to understand how much volatility you can stomach. If you are unable to tolerate sharp declines in your portfolio value, you should select lower-risk funds. Conversely, if you have a longer investment horizon and higher risk tolerance, you may consider more aggressive funds for higher potential returns.

Review Fund Performance

Although past performance cannot guarantee future returns, it is still an important reference. Look at how funds perform in various market environments, especially their resilience during downturns. Also compare a fund’s returns against relevant benchmark indices to assess the manager’s active management ability.

Pay Attention to Fee Structure

Fund fees have a direct impact on investment returns, so it’s critical to understand them. Key fees include subscription fees, redemption fees, management fees, and other operating costs. In long-term investing, even small fee differences can materially affect cumulative returns.

Investing in money market funds through Longbridge Securities exempts investors from subscription, redemption, and platform usage fees, helping reduce investment costs. (Actual fees and promotions may vary; please refer to the latest official Longbridge announcements.)

Understand the Fund Manager

The experience, investment style, and performance history of a fund manager are important factors to consider. An outstanding manager should have a clear investment philosophy, a disciplined process, and demonstrated risk management skills across different market environments.

Review Fund Size

Funds that are too small may face liquidity issues or risk being liquidated, while excessively large funds may restrict the manager’s flexibility.

Fund Investment Strategies

After choosing suitable funds, adopting the right investment strategies is equally important.

Regular Fixed Amount Investment (Monthly Investment Plans)

This strategy involves investing a fixed amount into your chosen fund(s) on a monthly basis, regardless of market ups and downs. The advantage is that your average cost is smoothed over time, reducing the risk of poor market timing. When markets fall, your fixed investment buys more units; when markets rise, you buy fewer units. Over the long term, this "dollar-cost averaging" method effectively reduces investment risk.

Regular investment plans are especially suitable for those with steady income who want to build a saving habit. The automatic deduction process makes investing easy and eliminates the need to constantly monitor market fluctuations.

Lump-Sum Investment

The advantage of a lump-sum investment is capturing a market opportunity when prices are relatively low, enabling you to fully benefit from a subsequent market rebound. However, lump-sum investing also exposes you to higher timing risk: if the market falls after you invest, you may face short-term paper losses.

For investors without much market timing experience, consider splitting your lump sum into three to six parts and invest these in regular intervals over several months to mitigate timing risk.

Regular Review and Rebalancing

Investing is not a "set and forget" activity. It is important to regularly review your portfolio’s performance and asset allocation. Market fluctuations can cause your original asset mix to drift. Rebalancing helps ensure your portfolio remains aligned with your risk tolerance and investment goals.

Generally, it’s recommended to review your portfolio at least once a year, or when your allocations deviate significantly from your targets. Rebalancing typically involves selling outperforming assets and buying underperforming ones, effectively enforcing a disciplined "sell high, buy low" approach.

Long-Term Holding

Frequent buying and selling of funds not only incurs extra costs but may also reduce your returns due to poor market timing decisions. Investors should cultivate a long-term mindset and avoid making emotional decisions in response to short-term market swings.

The Regulatory Environment for Funds in Hong Kong

Understanding Hong Kong’s fund regulatory environment helps investors protect their rights.

In Hong Kong, the fund industry is overseen by the Securities and Futures Commission (SFC). Any fund sold to the public in Hong Kong must be authorized by the SFC, ensuring compliance with disclosure requirements and investment restrictions. Investors can check the SFC website for a list of authorized funds.

Most funds in Hong Kong use the "unit trust" structure, where management companies run the fund and trustees (often banks) safeguard the assets while supervising and ensuring compliance with the trust deed. This "dual safeguard" system offers extra protection for investors.

Longbridge Securities holds Type 1, 2, 4, and 9 licenses from the SFC, providing individual investors with a compliant and secure investment platform for funds and other financial products.

Frequently Asked Questions

What is the minimum investment amount for fund investment?

Minimum investment amounts vary by fund and platform. Generally, a lump-sum investment requires from several thousand to tens of thousands of HKD, while monthly investment plans usually start as low as HKD 500–1,000 per month. Some online platforms offer even lower barriers, allowing small investors to participate.

What is the difference between funds and stocks?

Stocks represent shares of ownership in listed companies; investors hold company equity directly. Funds, on the other hand, are portfolios managed by professionals—investors own fund units. Funds offer instant diversification and lower risk than single-stock investments, and are suitable for those lacking time or expertise. However, investing in funds means paying management and related fees, while direct stock investment usually only requires a brokerage commission.

Can funds lose money?

Yes. Fund investment is not principal guaranteed. The value of a fund fluctuates with the market performance of its assets. If the market drops, the NAV of your fund units may fall below your purchase price, resulting in unrealized losses. Even bond or mixed asset funds carry risk—though generally less than equity funds. Investors need to be mentally prepared for short-term volatility and select funds suited to their risk tolerance.

Should I choose actively-managed or passively-managed funds?

Actively managed funds rely on the manager to pick investments aiming to outperform the market; passively managed funds (like index funds and ETFs) simply follow an index. Active funds generally charge higher management fees but might deliver higher returns if the manager excels. Passive funds have lower fees, and over the long term, many active funds struggle to consistently beat their benchmarks. Choose based on your confidence in the manager’s ability, fee sensitivity, and your investment goals.

When is the best time to invest in funds?

It’s almost impossible to time the market perfectly—trying to "catch the bottom" often leads to missed opportunities. For long-term investors, starting early and investing consistently is usually more important than waiting for the "best moment." If you are concerned about short-term market volatility, consider regular fixed-amount investment to lower timing risk via dollar-cost averaging. The key is to stick with an investment plan based on your financial situation, goals, and risk tolerance.

Conclusion

Fund investment provides Hong Kong investors with a convenient, professional, and diversified wealth management approach—albeit with its own risks. By understanding the characteristics of different types of funds, assessing your investment objectives and risk tolerance, you can build a portfolio suited to your individual needs.You can learn more about investment strategies through the Longbridge Academy or by downloading the Longbridge App.