A Pizza-like Investment
It has been a realism that monetary necessities are likely to grow over your lifetime. While your income derived from employment may grow at a steady rate, inflation will take its chunk, and will reduce your purchasing power. The traditional vehicles of investments such as bank deposits, money market instruments, and the like may not help you realize your goals. As such, the potential profit from your investments to buy your dream car, to afford you a holiday trip, or to fulfill your other dream of buying a new house may not be realized.
But there’s hope because good investment options, such as mutual funds, may help you achieve your goals.
How does a mutual fund work? I have been in the financial industry for many years advocating financial literacy, and when I talk about mutual fund, some people say it is not exciting. Well, that’s because they don’t have any knowledge about how mutual fund works. Allow me to explain how a mutual fund works, by comparing it with a food for all occasions that we love — pizza.
Assume that you are craving for a pizza. However, you don’t know how to make one. Your alternative is to just buy from a pizza chain. But what pizza chain will you choose? You go to the best pizza parlor in town that makes and serves pizza delicacies. The pizza parlor is like your chosen fund company. Since it is a bit costly as it does not sell pizza per slice, buying the whole piece won’t do because the big pizza is too much for you to eat. So, you call your friends to join you. You can pool your money together, buy it, and have a pizza treat for your group.
The Chef of the pizza parlor is like the Fund Manager. You and your friends who are pooling money together for the pizza treat represent the investors who participate in a fund. With the chef’s expertise in making pizza, he makes you a good product by mixing the appropriate quantity of ingredients like flour, veggies, meat, salt, herbs, cheese, etc. These ingredients denote the various stocks and/or bonds, etc. in a mutual fund portfolio that a fund manager takes care for the investors.
The expert chef produces the right blend of ingredients to make a delicious pizza and will make you delighted. This is the same as the expert fund manager creating the right mixture of stocks, bonds and other securities to get the best return of investment in your portfolio. Depending on your contribution, you will be allotted pieces of the pizza. In the same way, depending also on your investment, you will get your corresponding returns.
An individual has many options for the kind of pizza they want to eat. This holds true in a mutual fund, where there are options you can choose from. These include money market fund, equity fund, debt fund, or even combinations among possible choices. Furthermore, just like the need for you to choose the right pizza chain, you need to choose the right mutual fund scheme that can deliver your expected returns.
Hopefully, the above analogy gives you an understanding of how a mutual fund works. But there are other aspects you will need to understand. Here are some things you need to know:
- Risk profile assessment
- Entry, management and exit fees
- Diversification and liquidity concepts
- The role of the Securities and Exchange Commission
- Basic knowledge of the computation of net asset value per share.
Now, you can do your own research and consult your financial advisor to know more the ins and outs of a mutual fund.
I have been conducting financial and business private consultations, and people are very eager to learn about the options where they can invest their money. However, during follow up consultations, they tend to procrastinate. They don’t act by opening an account with a licensed representative.
This is a reality among prospective investors, which I wish to change through proper financial literacy education.
Don-Don Adolfo Crisostomo is a Registered Financial Planner of RFP Philippines. To learn more financial planning, join the 66th RFP program this November 2017. To inquire, e-mail email@example.com or text <name><e-mail> <RFP> at 0917-9689774.
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