What is a Mutual Fund?

Description

A mutual fund pools the capital of many individual and institutional investors which it then uses to invest in assets it hopes will rise in value or produce cashflows over time.

Mutual funds mainly turn a profit by buying and selling securities or receiving cashflows from the aforementioned securities (in the form of dividends if through stocks and interest if through bonds). The profits are then passed onto the mutual fund’s shareholders after relevant expenses have been deducted.

To this end, mutual funds may be actively or passively managed. Actively managed funds make investments based on the research and work of their management team. Passively managed funds attempt to mirror the positions of a benchmark or another fund (a “target” fund). Actively managed funds typically charge higher fees than passively managed funds.

Mutual funds thus allow investors to buy an immediately diversified basket of assets without needing to actively put in the work managing their portfolio. As a result, mutual funds have grown to be popular investments for those hoping to set up retirement funds for themselves or tuition funds for their children.

Minimum initial investments for mutual funds typically run between PhP1,000.00 to PhP5,000.00 which is lower than the PhP8,000.00 and above usually needed to invest in actual stocks and bonds. Recent developments in financial technology have also given investors the option to invest in mutual funds for as low as PhP50.00 such as through GCash’s GInvest program. (See our step-by-step guide to learn how.)

Types

As per the PIFA, there are mainly four (4) basic types of mutual funds in the Philippines, namely:

Stock (or Equity) Funds

Stock funds buy and sell company shares of stock. Stock funds are usually deemed the most aggressive form of the four “standard” fund types given their potential for substantial gains but also proportionate potential losses. Nonetheless, stock funds remain very popular among investors given that stocks have typically performed well over the long term.

Bond Funds

Bond funds invest in securities such as treasury notes issued by the government or commercial papers issued by companies. Bond funds are considered more conservative compared to stock funds and they typically focus more on capital preservation than outright growth.

Balanced Funds

Balanced funds invest in both stocks and bonds. Investors who thus want some of the growth potential offered by stocks and the defensive nature of bonds may find balanced funds to be an ideal addition to their portfolio.

Money Market Funds

Money market funds are essentially the same as bond funds only they invest in securities which have maturities of one year or less. Money market funds thus generally have lower promised returns than bond funds but are considered more secure and defensive than bond funds.

Tips

  • Make sure to do your own research before buying shares in your mutual fund of choice. Most of all, make sure management is capable and trustworthy. Make sure the fund is registered with relevant regulatory bodies.
  • As with any investment, only invest what you can afford to lose. If you need the money any time soon, it probably isn’t wise to just throw it all into an investment scheme.
  • Even with mutual funds, diversify. In theory, the more shares you hold from different funds, the more you can potentially limit the risk of any one of them wiping you out.

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