A Primer On Mutual Funds
Hi Sir Jesi!
My name is Sarah and I’m one of the attendees in your financial talk in Antipolo. You mentioned about investing in mutual funds and I am interested to start investing. Can you please enlighten me on what is a mutual fund investment? Thank you and God bless.
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Hi Sarah. I’m assuming that you are one of the graduating students who attended my financial talk in Antipolo and I’m glad to hear that you’d like to start your investing journey at a younger age which can work well towards your advantage.
One of the most important elements of investing is timing. The earlier you start the better chance you have in accumulating money towards your goal.
Investing in mutual funds is a great avenue to expose you in paper asset investments. Did you know that as low as P1,000 you can already start investing in mutual funds? But before you do, let me give you a rundown on how mutual fund works.
What is a mutual fund?
A Mutual Fund is an investment that pools together money from different investors and invests them in various securities depending on the investment objective of the fund.
The mutual fund company issues shares to the investors that represent their holdings in the fund.
Think of it like your “paluwagan” saving scheme with your friends. In “paluwagan”, each member contributes a certain amount to the “treasurer” in the group with the intention of distributing the collected funds to its members in a specified schedule.
The goal of the “paluwagan” is merely savings, no interest involved and the treasurer’s role is just to distribute the collection.
Investing in mutual fund in some sense works the same. People contributes money and instead of a treasurer, a fund manager is tasked to handle and managed the money collected from investors.
The fund manager’s primary role is to invest the money to specific assets like stocks, bonds, money market, etc. with the intention of earning profit.
Unlike in paluwagan where you have to wait for your assigned schedule before you can enjoy your savings, in mutual fund investment, you can withdraw your money anytime.
However, some mutual fund companies impose holding periods and you may be charged with a withdrawal fee if you redeem your investment within the holding period.
We’ll discuss more on the fees later in this article.
Simply put, when you invest in mutual funds, you are entrusting your money to a professional fund manager to invest on your behalf in the hope that he can make your investment grow.
Types of mutual funds
The good thing about mutual fund investment is you have the liberty to choose what type of asset class you’d like your money to be involved with. Here are some basic types of mutual funds classified according to their investment objective:
Money market Funds—They are invested purely in short-term (one year or less) debt instruments such as government treasuries.
Bond funds—They are invested in long-term debt instruments. Investments may include government and corporate bonds.
Stock funds / equity funds– They are actively managed funds. They are invested primarily in shares of stock listed in the Philippine Stock Exchange.
Balanced funds—They are invested in both shares of stock and debt instruments.
Index funds– They are passively managed and invested in stocks comprising a particular index they are trying to mirror e.g. Philippine Stock Exchange Index or PSEi
If you are planning to dip your hand into stock investing, choosing either Equity Fund or Index Fund is the way to go. Just remember, since these funds have potential higher returns, they also carry more risks as compared to other funds.
How do you earn in mutual funds?
You earn through capital appreciation. The price of your mutual fund investment is represented by Net Asset Value per Share (NAVPS). If the Net Asset Value per Share (NAVPS) of the mutual fund you invested in increases in price, you can then sell your investment for a profit. In the same way, if the NAVPS of the mutual fund you invested in decreases, you may realize a loss if you sell your investment.
What are the fees involved?
Since you are basically hiring someone to invest your money for you, fees are associated to compensate the mutual fund company.
These fees are typically paid for out of fund assets and not billed to investors directly. But by reducing the returns that would have been received on those assets, fund investors still pay indirectly. These fees appear on the prospectus under the heading “Annual Fund Operating Expenses.”
Hiring costs – Also known as the management fee, this cost is usually between 0.5 percent and two percent of assets on average.
Distribution and service fees – This expense goes toward advertising and promoting the fund.
Sales loads – These fees or the broker’s commissions are usually charged either upon purchase or upon sale.
Front end is when you pay the fee upon investment. It can range between 0.5 percent to 1.5 percent.
Back end is when you pay the fee when you redeem investment. It can range between one percent to five percent.
Higher potential return – Since your investment is exposed to different types of asset classes such as stocks, your money has better chances of earning more profit compared to your regular savings account.
Instant diversification – Your investment is spread across different stocks of companies and different industries, thus managing the risk by reducing the impact of low performing stocks.
Professional management – You have a professional fund manager who handles and oversees your investment.
Liquidity – You can withdraw your investment at any time based on the prevailing NAVPS.
Affordability—Initial investments are low. Some mutual fund companies let you open an account as low as P1,000.00.
Returns are non-guaranteed – Mutual fund investment offers potential higher return but is not guaranteed. Profit is dependent on the performance of the fund and investments are not covered by PDIC.
Costs and fees – As discussed, mutual investment carries costs and fees that can impact your overall return.
Remember that investing takes time to bear favorable fruits. Be patient. Hitting investment goals overnight rarely happens. Successful investors are patient enough to wait for their investment plan to work out.
All the best!
Jesi Bondoc is a Registered Financial Planner of RFP Philippines. He is the Director of My Wealth MD and Partners, Inc. specializing in investment advisory. You can send your money questions at email@example.com and they’ll be answered on his next article. For more info about Registered Financial Planner program, e-mail to firstname.lastname@example.org or text <name><e-mail> <RFP> at 0917-9689774.
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