Introduction to Mutual Funds

Say you want to get into investments, but you either don’t have the expertise nor the capital to invest in the stock or bonds you want. A practical option you may want to consider would be putting your money in mutual funds. Mutual funds, at their most basic, are pools of capital that are consolidated and managed by fund managers for the benefit of everyone who contributed.

In the Philippines, there are four types of mutual funds that you could consider putting your money into: stocks (or equity), bonds, balanced, and money market.

STOCK (OR EQUITY): These are readily available on the Philippines Stock Exchange (PSE). These are perhaps the most potentially profitable for the prospective mutual fund investor, but the risk they carry is equally high, due to fluctuations in the stock market.

BOND – These fixed-income securities are promissory notes from the government or major corporations that you’ve placed a certain amount of money within their care for a certain period of time.  Risk is low because you know just how much you will get back for your investment, and over what period of time.

BALANCED – As the name suggests, this is a mixture of equity and bond funds. The high potential growth of equity investments is tempered by the conservative growth of bonds, resulting in returns that are midway between high and conservative.

MONEY MARKET While this is a form of fixed-income security, the terms for money market mutual funds are generally short-term investments, and widely considered to be safe as bank deposits, albeit with a higher yield.

 

YOUR ASSETS WILL BE MANAGED BY A PROFund managers will handle the financial transactions using the consolidated capital. Find a fund manager who will work with you and has a proven track record in dealing with the sort of stocks you’d like to invest in. This is less risky than going into investment on your own, as fund managers are liable to all of the investors of the mutual funds they handle. If they’re good at their jobs, then everybody who invested gets to profit.

 

IT’S NOT PUTTING YOUR EGGS IN ONE BASKET  In any sort of investment, something you will hear often is to diversify your portfolio, or invest in more than one company or type of stock so as to offset the risk of putting all your eggs in one basket. In this case, however, with capital coming from multiple investors and handled by a credible fund manager, mutual funds are already diversified across different securities and money instruments, rather than a single company or type of stock.

 

THE RISK IS SHAREDBy the very definition, a mutual fund is a communal risk, meaning that any responsibility borne of a stock failing or dropping is one that will be shared between everyone who invested. Thus, individual investor risk is lower than if they’d put their money in on their own.

  

PROFIT THROUGH PATIENCE Remember the expression that time is money? This is certainly true in the case of mutual funds, as dividing the risk between the different investors means that the rewards will be likewise shared. Thus, the profit to be made is lesser than what it would be on your own, but given the security blanket such an arrangement creates, mutual funds remain a most popular form of investment.