Mutual funds. They’re a widely popular way to grow your money. Great for newbie investors!

But, many of us don’t really understand how mutual funds work and how they help increase our wealth. Today’s post aims to educate and equip you with the basic need-to-know information about mutual funds.

WHAT is a Mutual Fund?

A mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and similar assets (Investopedia.com)

WHO manages your Mutual Fund investment?

Mutual funds are actively managed by money managers. Money managers actively trade assets with the money invested in the fund, thus generating income for the investor. Managers are required to trade within the structure and objectives of that specific fund as stated in the mutual fund’s prospectus.

WHY invest in a Mutual Fund?

Mutual funds provide small investors access to a much diversified portfolio of a investments (stocks, bonds, and other securities). Also, unlike any other investments requiring very large amounts of money, mutual funds only require at least Php 5000 as an initial investment and Php 1000 minimum for every additional investment. Many investors also prefer their investments managed by professionals so they have much less to worry about. Mutual funds are also considered to be highly liquid assets.

HOW do you buy a Mutual Fund?

Mutual Funds are offered mostly by insurance and other investment companies (few banks have this, too) and is regulated by the Securities Exchange Commission. Some investment companies that offer mutual fund investments are ALFM Mutual Funds, Philequity Management Inc, First Metro Asset Management and Sun Life Asset Management.

HOW do you earn from a Mutual Fund?

The value of a share of the mutual fund, called the Net Asset Value Per Share (NAVPS), is calculated daily based on the fund’s total value divided by the total number of outstanding shares. If the NAVPS increases in value, you can sell your shares of the fund for a profit. Likewise, if the NAVPS depreciates, you may incur a loss if you sell.

Related Post: HOW Do You Make Money in Mutual Funds?

WHAT are the TYPES of Mutual Funds Available?

There are mainly four types of mutual funds in the Philippines: stock (or equity), bond, balanced, and money market.

• Stock or equity funds invest in shares of stock of Philippine corporations listed in the Philippine Stock Exchange. (Potentially High Returns, High Risk)
• Bond funds invest primarily in fixed-income securities such as bonds or treasury notes issued by the Philippine government and commercial papers issued by reputable Philippine companies. (Low Returns, Low Risk)
• Balanced fund is a mixture of equity and bond funds. The high potential growth of equity investments is tempered by the conservative growth of fixed-income securities. (Moderate Returns, Moderate Risk)
• Money market funds are similar to bond funds because they also invest in fixed-income securities and the growth of the fund is conservative, but are usually short-term such as one year or less. (Low Returns, Low Risk)

WHICH Mutual Fund is Right for me?

Choosing which mutual funds to invest in depends on the investor’s growth goal and risk tolerance. If the purpose is capital growth, equity funds are the way to go. If the investor prefers capital preservation over risky capital growth, bond funds are highly recommended. For those who want moderate risk and moderate growth, balanced funds are the best option. Money market funds are for those who wish to earn a conservative amount of return in the short-term.

IS there a Downside?

There’s always a potential downside when you invest your money. You pay sales load fees (one-time charges that the investor is asked to pay for buying into a mutual fund or for redeeming or selling shares owned in a mutual fund) and management fees (fees paid to the money manager). Also, mutual funds are subject to certain amount risk as well.

You have just learned the basics of the mutual fund!

Now go, be fruitful and multiply your assets.

photo credit: Unbroken, Easdale via photopin (license)