This is the first article in a 2-part series that takes an in-depth look at mutual funds.
You can read Part 2 by clicking here.
Familiarizing ourselves with how something works allows us to make better, confident and informed decisions. It will save us a lot of time, effort and resources because we won’t rely on trial and error, and at this day and age, provided we know where to look at, we can get all the vital information we need.
When it comes to our hard-earned money, familiarizing ourselves with our investment options is a must. We don’t want to rely on social media hype, trends and pop culture. We want to make sure we know what we’re getting ourselves into.
For us to appreciate mutual fund investing, it is imperative that we understand 3 basic concepts:
- How mutual funds work.
- How you make money by investing in mutual funds.
- How mutual fund companies actually make money.
How mutual funds work
Mutual funds or ‘Investment Companies’ basically pool or gather money from investors with similar or ‘mutual’ investment objectives. There are mutual funds for conservative investors. There are mutual funds for seasoned, aggressive ones. And there are mutual funds for those in-between.
The investors’ money is then assigned to fund managers who are specialized in particular asset classes.
It is then invested in these approved and publicly disclosed investment outlets: money market funds for conservative investors. Equity-laced funds for aggressive investors. And bond or balanced funds for those in-between - and when these generate returns, they are legally required to pass these back to the investors.
Mutual Funds are legit! In the Philippines in particular, their existence is established under R.A. 2629 or ‘The Investment Company Act.’
When you invest in mutual funds, you are not directly buying money market outlets, bonds, or stocks, but instead, you are buying shares of the investment company that is buying them on your behalf. That’s why your ownership is represented in NAVPS or Net Asset Value per share.
Since you are buying shares of an investment company, mutual funds are regulated primarily by the Securities Exchange Commission or SEC but they also abide by the regulations of the Bangko Sentral ng Pilipinas.
That’s why it’s important that you check the SEC’s website (https://www.sec.gov.ph) to make sure you are dealing with licensed mutual fund professionals AND registered mutual fund companies to avoid getting scammed.
Mutual funds are one of the more popular forms of investment especially for those who are just starting because they are affordable. Imagine, being able to start investing for as little as P5,000!
And because mutual funds pool money of investors together, they allow people to invest in higher-yielding outlets which most individuals can’t afford to invest in directly.
They instantly diversify your portfolio, because investing in just 1 mutual fund will give you exposure to 20, 30, or even 40 individual investment outlets.
Mutual funds are very liquid. You may buy shares without having to look for sellers. You may sell shares without having to look for buyers. The mutual fund company will take care of this for you. If they can’t find buyers or sellers, they will buy or sell your position.
And when it’s time for you to cash in on your gains, it’s worth noting that your earnings are exempt from Capital Gains Tax (CTRP 1998).
Last, but certainly not the least – when you invest in mutual funds, you won’t need to spend a lot of time researching, monitoring the market, doing trades. These things are all going to be done for you by the expert, full-time professional fund managers.
Read Part 2 here.
