For those who are new to investing in the securities/stock market or those who do not have time to monitor their portfolio closely, mutual funds provide a good alternative of getting oneself invested.

What is a Mutual Fund?

A Mutual Fund is an investment instrument that pools the funds of many individual and institutional investors to form a massive asset base. The assets are then entrusted to a full time professional fund manager who develops and maintains a diversified portfolio of security investments. People who buy shares of a mutual fund are its owners or shareholders. Their purchases provide the money for a mutual fund to buy securities such as stocks and bonds. A mutual fund can make money from its securities investments in two ways: a security can pay dividends and interest to the fund, or a security can rise in value. The fund passes any dividends, interest or profits on the sale of its portfolio securities, less fund expenses, to shareholders in the form of distributions.

In the Philippines, there are currently four basic types of mutual funds—stock (also called equity), balanced, bond and money market funds. Bond funds invest primarily in bonds such as treasury notes issued by the Philippine government and commercial papers issued by reputable companies in the Philippines . Having a full basket of only fixed-income securities, bond funds provide capital preservation while maintaining a conservative stance in terms of asset allocation. Like bond funds, money market funds also have a conservative stance since they have a full basket of fixed income funds. The main difference lies in the term of investments of money market fund investments, which is one year or less. Equity funds invest primarily in shares of stock issued by Philippine corporations. The dominance of stock issues within the portfolio positions the fund to attain a more aggressive rate of growth. Balanced funds invest in both shares of stocks and bonds, thereby accessing the growth potential of stocks tempered with the presence of secure fixed-income instruments. Professional fund managers create value for shareholders by providing superior yields within controlled risk exposures. Certainly, expective in both security selection and asset allocation go a long way in ensuring better long-term rewards for mutual fund investors.

What are the advantages of a mutual fund?

Mutual funds are professionally managed. This means somebody who is experienced and actually invests in the stock market for a living manages the funds’ assets.

When investing in the stock market, you’ll need to put up a considerable amount of money to get diversified because shares are typically sold in lots. In mutual funds, you can invest for as low as P5000.00 and your investment is automatically diversified and your risk is spread out because you will own a part of each company that the Mutual fund owns.

Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions.

In terms of liquidity of your investment, unlike other investment instruments where you need to find a buyer to liquidate your investment, mutual fund companies can buy back your shares at the prevailing Net Asset Value per share and you can get your money soon after.

What should I to look out for when investing in mutual funds?

Mutual funds typically have a sales charge. For example, you have P5000.00 that you want to invest in a mutual fund with a sales charge of 5%, 5% of P5000.00 is P250.

Subtract P250 from P5000, and only the remaining P4750 is what actually gets invested.

Also, there are expenses that come with managing the fund’s portfolio like the fund manager’s salary, administrative costs etc. These come in the form of the annual expense ratio. But these expenses are not necessarily transparent to you, the investor. So if your fund manager can’t live without his cappucino and buys a golden cappucino machine for his office, then he may declare that as part of the fund’s expenses.

So even though the fund may be performing well, expenses may eat into the fund’s returns. Another thing to note is that whether the funds are doing good or not, these expenses are charged to the funds. That’s why before buying a mutual fund, try to find out about the fund manager and his investment perspectives.

Always read a fund’s prospectus. As Warrent Buffet said “Risk comes from not knowing what you’re doing.” The more you know, the less your risk is.

For more information on mutual funds in the Philippines visit http://www.icap.com.ph/mf_101.html

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