What is a mutual fund?
What are the type of mutual funds and which one is suitable for you?
How do you earn money by investing in mutual funds?
What are the advantages and disadvantages of mutual funds?
What are the requirements in opening a mutual fund?
At some point of our lives, it crosses our mind that we want to invest our money to provide financial security by the time we retire. Several options become available to us: properties, stocks, and banks. Among the three, bank products are the most popular choice since it is the most liquid and require relatively lower capital. While savings account and time deposit are the traditional instrument people choose, mutual funds are slowly becoming increasing popular to many.
What is a mutual fund?
A mutual fund is pooled money professionally developed and managed to maintain a diversified portfolio of security investments.
Thus, if an investor buys a share of the mutual fund company, the investor adds his investment to other investors' to form the asset base. A Fund Manager then invests this to different financial instruments such as stocks, bonds, time deposits, and others within the fund's objective and guidelines.
Types of mutual funds
Money Market funds- invests in short-term (one year or less) fixed income securities
Bond funds- invests in medium to long-term (one year or more) fixed income securities and government/company bonds.
Equity funds- invests primarily in shares of stocks issued by Philippine companies.
Balanced funds- invests in both shares of bonds and equities.
Low-risk taking investors looking for higher returns than savings and time deposits may opt to invest in money market funds. Risk-tolerant investors on the other hand may opt for bond funds.
Aggressive and risk-tolerant investors who understand the stock market may opt for either equity or balanced funds.
How do you earn money by investing in mutual funds?
-When the money you invested increases in value by investing in well-performing companies.
-When the company you invested in gives dividends
-When the bond funds you invested in gives interest income
What are the advantages and disadvantages of mutual funds?
Mutual funds are the ideal choice for building wealth in a long period of time. It can be used as savings instrument for retirement or build-up of cash fund for a specific financial objective in the future.
It has a relatively lower capital requirement that may go as low as PhP5,000 and yet the returns are higher compared to letting your money rest in savings account.
As the saying goes "do not put all your eggs in one basket," this is particularly true to mutual funds. Aside from the diversified portfolio of asset base lowers the risk of investors, mutual funds are highly regulated by the Securities and Exchange Commission.
A professional fund manager handles the investing in behalf of the investors. Thus, the investor may still earn significant gains even with little or no background on investing. However, this is the reason why mutual funds managers may charge higher management fees. In addition, considering that fund managers do the diversification, he/she has the connection to the different securities and not the investor. The returns also aren’t fixed since it still depends on the health of the economy.
Regardless of the aforementioned downside, the advantages still outweigh the disadvantages.
What are the requirements in opening a mutual fund in the Philippines?
As a start, the investor is assessed by answering a form called Investor Profile Questionnaire which will identify the type of investor he is (conservative, moderate, or aggressive). From the result, he/she may also choose what type of mutual fund is suitable for him/her.
The mutual fund licensed adviser assists the investor in opening an account and choosing the appropriate fund for him/her. The adviser discusses with the investor everything he/she needs to know about the investment he/she is getting into. The adviser may also give recommendations depending on the investor’s financial status and objective.
When the investor finally decides on the type of mutual fund, the he can already open the account upon submission of requirements.
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