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.
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:
- 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.
- 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.
- 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.)
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:
- 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.
- 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.)
- 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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