One of the most common ways to invest in mutual funds is through investment-linked insurance plans. Such plans, offered by the many global insurance companies operating in Hong Kong, are the darlings of financial advisers and have been sold to investors looking for alternatives to bank deposits in recent years.
These contractual or long-term savings plans require a monthly investment which is allocated among funds contained within the plan and selected by the investor.
The sales pitch goes something like this: if you value your future security you need to invest regularly and in a disciplined way; if you want to reach your retirement target, you'll need to save a fixed amount for the next few decades; so the best product for you is a 20 or 30-year contractual savings plan.
The first part of this is true. Regular, disciplined saving is almost certainly the best way to provide for a secure future, and contractual savings plans do impose a discipline on those who might otherwise fritter away their income.
They offer other benefits, including the ability to invest small, regular amounts in funds which would otherwise require large minimum investments. By purchasing units regularly and at fluctuating prices, the investor takes advantage of dollar cost averaging. The plans also allow a certain amount of free switching between funds within the product.
By this time, you should be nodding your head vigorously and priming your ballpoint to sign on the dotted line. But before you do, consider what the salesperson leaves out of the presentation.