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It’s been a while from con­tin­u­ing the series about finance. But don’t wor­ry, I asked a close friend who is an expert in mutu­al funds to share his knowl­edge and expe­ri­ence about it.

Should You Invest in Mutual Funds?

By Sevi­no Estil, Finan­cial Advo­cate and Founder of Beyond Build­ing Wealth

That’s the same ques­tion I get when I first start­ed learn­ing on how and where I should invest my mon­ey. And so, when I did my research, I found myself going back to the basics: Know­ing what invest­ments real­ly are and what invest­ment prod­ucts that fit my needs and goals. Let’s start with some of the basics.

What are Investments?

Invest­ments are assets that you acquire with the expec­ta­tion that it will appre­ci­ate val­ue over time in which can give you returns. These can vary from dif­fer­ent prod­ucts or vehi­cles that let’s your mon­ey grow. It can be mutu­al funds, stocks, forex, busi­ness­es, real estate and even VULs.

Keep in mind that invest­ments can NEVER give you guar­an­teed returns. Mean­ing invest­ment prod­ucts and vehi­cles have their dif­fer­ent RISKS and thus your asset can either lose mon­ey or gain prof­it. Just like busi­ness­es, right? That’s the idea to it.

So now that we got that set­tled, let’s look at Mutu­al Funds.

What are mutual funds?

Mutu­al funds are invest­ment instru­ments by which the mon­ey of the investors is com­bined or pooled togeth­er and that are invest­ed in the stock mar­ket or fixed income vehi­cles by pro­fes­sion­al fund man­agers.

The fund man­agers in turn makes the pro­fes­sion­al finan­cial deci­sions for us by buy­ing and trad­ing shares in the PSEi (Philip­pine Stock Exchange Index) using the pool of mon­ey of the investors.

The gains and prof­its will then be shared to the investors that is pro­por­tion­al to what they’ve invest­ed.

This also means that you no longer must learn how and when to buy and trade shares in the stock mar­ket. The long and com­pli­cat­ed efforts in study­ing finan­cial mar­kets and the skills need­ed to be a good trad­er will now be the fund manager’s respon­si­bil­i­ty.

While as the investors will only need to invest their mon­ey and wait to see their mon­ey grow until it reach­es their tar­get fund amount.

Let me now answer some of the com­mon ques­tions about Mutu­al Funds.

Are mutual funds guaranteed investments?

The answer would be no! All invest­ments have risks, and you would only hear guar­an­teed invest­ments when it is a scam. Read that again. Guar­an­teed invest­ments are SCAMS.

Be aware and dili­gent that ALL invest­ments have risks. And the only way to pre­vent los­ing mon­ey is by study­ing how the invest­ment works and man­ag­ing the risks that are involved. Much like before open­ing a busi­ness ven­ture, you study and man­age the fac­tors that will pre­vent your busi­ness from clos­ing.

It’s the same prin­ci­ple with Mutu­al Funds, you man­age your risks.

How can you manage risks?

You can man­age risks by invest­ing in fixed amounts on a reg­u­lar sched­ule let say month­ly basis or even more fre­quent­ly. This strat­e­gy is known as Cost Aver­ag­ing Method, by doing this, you buy more shares when the share price is low­er (in shop­ping terms, it’s on red hot sale).

The prin­ci­ple can be sim­ply sum­ma­rized that con­sis­tent month­ly invest­ing man­ages the risks involved in mutu­al funds.

What are the different kinds of mutual funds?

There are sev­er­al kinds of mutu­al funds and a lot more when you check the dif­fer­ent kinds of mutu­al fund prod­uct per Mutu­al Fund Com­pa­ny. As basics, I’ll share with you these:

1. Fixed Income Funds, this is also known as Bond Fund. This is invest­ed in trea­sury bills, and com­mer­cial papers. This is the best fit for those who have finan­cial goals of 6 months until 2 years time­line, also called Short Term Goals. This is less risky com­pared to the oth­er mutu­al fund types. The Rate of Return (ROR) varies from mutu­al fund com­pa­ny and can range from 1% to 4% annu­al­ly.

2. Stock Funds com­bined with Fixed Income fund, also known as Bal­anced Fund. This is a com­bi­na­tion of Bond Fund and the Equi­ty Fund where in it becomes riski­er with high­er return than Bond Fund, but less risky with low­er return than Equi­ty Fund. This is best fits peo­ple who have finan­cial goals of 2 years until 4 years time­line, also called Medi­um Term Goals. The ROR varies from mutu­al fund com­pa­ny and can range from 4% to 10% per annu­al­ly.

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3. Last­ly, Stock Funds, also known us Equi­ty Fund is the high-risk type of mutu­al fund where­in the fund man­ag­er invests the mon­ey in the stock mar­ket. Usu­al­ly, the invest­ment relies on the top per­form­ing com­pa­nies in the PSEi, also called the Blue-Chip Com­pa­nies. This fits bet­ter with investors that have Long Term Goals where in their finan­cial goal time­line ranges from 4 years and above. The ROR ranges from 8% until 15% (some mutu­al fund com­pa­nies can per­form high­er than 15%, just do your research on it.)

What are the advantages of investing in mutual funds?

Based from my expe­ri­ence and com­par­ing it to oth­er kinds of invest­ment vehi­cle, I’ve come up with these list of advan­tages:

1. High Poten­tial Earn­ings, aver­age yields of 6–18% per year when you invest long-term and stay con­sis­tent in invest­ing.

2. Pro­fes­sion­al Fund Man­age­ment, mean­ing you have a full-time, skilled & pro­fes­sion­al fund man­ag­er that does all the research, selec­tion and mon­i­tor­ing of your invest­ments. The hard work is being done by the pro­fes­sion­als and all we need to do is to con­sis­tent­ly invest in our mutu­al fund accounts. That trans­lates to more time for me to focus on what’s impor­tant in my life: my wife, fam­i­ly, career, busi­ness and my min­istry to Christ.

3. Mutu­al fund invest­ments are spread across a wide range of com­pa­nies and indus­try sec­tors which low­ers your risk if a com­pa­ny or sec­tor per­forms bad­ly. This is anoth­er risk man­age­ment strat­e­gy that fund man­agers prac­tices to pre­vent and min­i­mize los­es of the investors’ mon­ey.

4. Afford­able, yes, it is afford­able to start your mutu­al fund invest­ment. The min­i­mum ini­tial amount is PHP 5,000 to open your account, and the min­i­mum addi­tion­al amount is PHP 1,000. You don’t need hun­dred thou­sand or mil­lions to start invest­ing.

5. Tax-Exemp­tion (based on R.A. 8424 or Tax Reform Act of 199, mutu­al fund earn­ings are not sub­ject to 20% with­hold­ing tax). Your earn­ings and gains in your mutu­al fund will not be sub­ject­ed to tax.

6. Liq­uid­i­ty, you can eas­i­ly with­draw your earn­ings from your mutu­al fund account. Investors can redeem their shares at the cur­rent net asset val­ue (NAV) of their invest­ment eas­i­ly and at any time. (Just check with your mutu­al fund com­pa­ny with regards to their pol­i­cy and pro­ce­dures in doing so, for it also varies per com­pa­ny.)

7. Safe­ty & secu­ri­ty. Mutu­al fund com­pa­nies are high­ly reg­u­lat­ed by Secu­ri­ties & Exchange Com­mis­sion & are audit­ed reg­u­lar­ly by exter­nal audi­tors. Couldn’t get any secured and safer than that.

What are the Disadvantages?

Now that we’ve learned about the advan­tages let’s now look at the dis­ad­van­tages, because there’s no such thing as a per­fect invest­ment vehi­cle. Let me share to you these:

  1. Uncer­tain­ty of returns, not guar­an­teed. Unlike fixed-income prod­ucts (such as time deposits), your invest­ment does not guar­an­tee a pos­i­tive return, you can lose mon­ey.
  2. Lack of con­trol. Investors can­not direct­ly influ­ence and make deci­sions on which secu­ri­ties the fund man­ag­er should invest in. Thus, you’re left just “sit­ting at home” and hop­ing that your port­fo­lio advis­er makes good invest­ment deci­sions. Every deci­sion will be made by the fund man­ag­er.
  3. Costs and fees, this includes sales com­mis­sions and redemp­tion fees that are applied to your invest­ment if you decide to redeem your mon­ey in your MF account. This can sig­nif­i­cant­ly affect your expect­ed returns. (This again var­ied per mutu­al fund com­pa­ny so make sure you check their poli­cies and reg­u­la­tions with regards to their fees.)
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Are mutual funds the right investment for me?

We are back to our title top­ic. If you are still new to invest­ing and in the finan­cial mar­kets, mutu­al fund is a great and high­ly rec­om­mend­ed way for you to start. Since it’s pro­fes­sion­al­ly man­aged, you don’t have to learn macro eco­nom­ics, you just need to invest your mon­ey reg­u­lar­ly and give time for your mon­ey to grow. Think of it as train­ing wheels. Then even­tu­al­ly, as you learn and gain expe­ri­ence you can immerse your­self in oth­er types of invest­ments.

What to consider before investing in mutual funds?

The best way to con­sid­er is by cre­at­ing and review­ing your goals, time frame and your risk tol­er­ance. All these three will play a huge part in mak­ing your deci­sion and in choos­ing the right mutu­al fund com­pa­ny and mutu­al fund prod­uct that fits your needs and in achiev­ing your goals.

How to get started?

Once you know your goals, time frame and your risk tol­er­ance, all you need to start are:

  1. First and fore­most, fill out the mutu­al fund forms (check with the mutu­al fund com­pa­ny on how and where to get their appli­ca­tion forms). Make sure all your infor­ma­tion and spelling of your name is legal­ly cor­rect to pre­vent any prob­lems or dis­crep­an­cies along the way.
  2. Pre­pare the ini­tial invest­ment amount, most of the time the ini­tial min­i­mum invest­ment is 5,000 pesos. You can either deposit it to the mutu­al fund company’s offi­cial accounts, direct­ly deposit it via the company’s cashier, via deb­it card and/or cred­it card. (This varies per MF com­pa­ny.)
  3. Pho­to­copy one valid gov­ern­ment ID as proof of iden­ti­fi­ca­tion for your appli­ca­tion.

That’s it! If you think about it, it’s like open­ing a bank sav­ings account.

How to withdraw?

And since we are talk­ing about invest­ments and gains, we need to know how you can redeem your mon­ey. You can with­draw by con­tact­ing your invest­ment advi­sor to sell your shares and they’ll be the ones to guide you on how and when the mon­ey will be giv­en to you.

I’ve been an investor for more than 5 years now and I’m still learn­ing as of this moment. With this arti­cle that I’ve shared to you, I hope you’ll not just stop learn­ing here but read oth­er resources and even attend sem­i­nars on finance and invest­ments. Most impor­tant­ly get a men­tor that will help you and guide you in becom­ing a suc­cess­ful investor. Whether it be via mutu­al funds or oth­er types of invest­ment, make sure that by the end of this arti­cle, you’ve decid­ed to start invest­ing, because the great­est guar­an­teed loss that you’ll ever have in your life is invest­ing when it’s too late.

What’s next? Stay tuned!

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I blog about my dis­cov­er­ies and learn­ings with per­son­al devel­op­ment, blog­ging, writ­ing, pub­lic speak­ing, and pub­lish­ing. I am a Jesus fol­low­er. Each month, I send out a newslet­ter with free tips on those top­ics.

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