Provident fund schemes should provide suitable investment options that can meet the needs of plan participants at different stages of their lives, enabling them to construct their investment portfolios that correspond to their risk tolerance level. Given that retirement investments are long-term investments, in order to obtain the beneficial effects of risk diversifications and attain relatively stable investment returns, participants should effectively allocate their investments in different investment instruments and different regions even throughout different economic cycles.

The investment options of provident fund schemes in the market typically include equities, bonds and money market instruments, of which these 3 asset classes span across the risk spectrum of high, medium and low-risk levels. According to a global survey of provident fund schemes, majority of the schemes offer lifestyle funds, typically, growth funds (composed of 70% in equities and 30% in bonds), balanced funds (composed of 50% in equities and 50% in bonds) and conservative funds (composed of 30% in equities and 70% in bonds). These schemes allow participants to choose funds with predetermined allocations of equities and bonds to meet the investment needs of the participants over their lifetime. There are also a few schemes that only provide a single investment option, or directly invest in the company shares of the employer and these schemes are quite unlikely to provide risk diversification benefits and achieve the objectives for retirement investments.

Besides, pension schemes of certain developed markets have increased their investment options from three to five options to several dozens within a few decades from their scheme establishment to meet the personal expectations of its participants. This is owing to the requests from the participants to have more extensive investment options.

However, studies have shown that an excessive number and similar types of investment options not only fail to provide better benefits, but also make comprehending the characteristics of each investment option and the decision process more burdensome for participants. More options also mean that the participants not only need to digest and absorb more information, he or she will also need to have a stronger decision-making capacity. Excessive options will often result in the participant feeling confused and not knowing how to make the best choices and will moreover complicate the monitoring and management of the plan. Therefore, the plan provider should make a prudent assessment regarding any new investment option, which should take into particular account the investment knowledge level and risk tolerance of the participants.

To conclude, provident fund schemes should have sufficient investment options for participants to be able to construct a diversified portfolio, and the respective plans should comply with the scheme’s set objectives, as well as conform to the investment knowledge level and risk tolerance of the participants. Each of the participants in the plan should also fully comprehend his/her conditions and risk tolerance, and accumulate long-term assets for retirement savings through disciplined investment habits.

Generally speaking, equity, bond and money market instrument are the basic investment tools for retirement investments. Among these, equity is an asset class that tends to grow or fall in tandem with the economy. While its volatility is more pronounced in the short term, it has greater growth potential in the long term. At the same time, the possibility of registering negative return or very low return in the short-term is higher. Relative to bond and money market instrument, the risk of equity investment is higher.

Investment fund is often used as the investment vehicle for retirement plans. Depending on the level of investment diversification, equity fund can be divided into three main types: single-territory equity fund, regional equity fund and global equity fund. As the name implies, single-territory equity fund invests in equities of a single territory or country such as Hong Kong and Japan; regional equity fund invests in more than one territory or country such as Asian or European equities; global equity fund invests in equity markets around the world.

The investment objective for equity fund is to achieve capital appreciation over the long term, it is not suitable for short-term speculation, as results can only be seen in the long-term. The above diagram illustrates the relationship of potential risk and return of different investment instruments. With regards to equity funds, single-territory equity fund has the highest potential risk and return whilst global equity fund has the lowest potential risk and return for investors.

The above table illustrates the calendar year returns of global equity, Asia ex Japan equity (regional equity) and Hong Kong equity (single-territory equity) over the past 20 years (1990 - 2009). As seen from the figures, the return of the global equity fluctuated the least.

High-risk investment options for retirement investments are mainly used to help scheme members accumulate assets over a longer investment period. Generally speaking, high-risk investment options are more suitable for scheme members who can bear higher risks such as younger persons or those with longer investment periods. Long-term investments can help withstand short-term fluctuations in the market, and the use of fixed-period contributions for long-term investments (such as monthly contributions) can achieve the effect of dollar cost averaging as well as alleviate the effect caused by short-term market fluctuations on the investments.

Investment funds generally charge different types of fees. Normally, the fees charged by institutional class of investment funds involve management fees and administration fees, whereas the majority of retail class of investment funds, besides charging management fees and administration fees, may also involve front-end fees and redemption fees.

In order to gain a competitive edge, or for other business considerations, some fund companies and distributors will offer fee exemptions to investors. Aside from immediate fee discounts, the following two types of rebates are also made:

A fund manager mainly relies on the profit returns from his / her chosen investment instruments to increase the asset value of the fund. Profit returns in general can be classified into the following three types:

Generally speaking, from the three aforementioned types, capital investment profits account for most of the overall fund profit return. When the overall fund profit return increases, the fund unit price will also increase proportionally.

In general, investment funds utilize a unit price, i.e. the net asset value per unit, as the basis for their trading. The fluctuations of the unit price are mainly influenced by the fluctuation of the value of investment instruments held in the fund.

The unit price of the investment fund is calculated as follow:

As the daily trading cost, management fees, as well as any other administrative fees of an investment fund are generally all deducted on the same day, the daily unit price has already reflected such fees and no additional fees are charged. Moreover, the unit price in general is calculated at the end of each working day.

Investment fund can be divided into two main classes, the retail class and the institutional class. Investment fund which investors subscribe through distributors, such as banks, is generally classified as the retail class, whereas institutional investors who fulfill certain requirements subscribe for investment fund is classified as the institutional class*. Both classes deviate largely in their charges.

The fees for the retail class of investment fund normally include the front-end fee, management fee and the administration fee etc.

Front-end fee:If an investment fund is quoted with bid and offer prices, the front-end fee is reflected in the price spread. On the other hand, if the unit price of a fund is quoted in term of net asset value (NAV) per unit, the front-end fee is generally deducted from the investment capital of investors.

Management fee:The management fee is an annualized fee. Normally it is charged daily to the fund and reflected in the fund's net asset value (NAV).

In general, the front-end fee and the management fee for the retail class of investment fund are listed on the fund fact sheets and the administration fee is usually not disclosed. As for the level of fees, each fund house has its own commercial decision with different level of fees. However, in general terms, the more sophisticated the investment instrument, the higher the fees levied.

Normally, there is no front-end fee for the institutional class of investment fund. Both the management fee and the administration fee are relatively lower than that of the retail class of investment fund.