Explain It To Me Like I’m A 5-Year-Old: Mutual Funds In The Philippines

3 min read By eCompareMo on April 4, 2016

See if this type of investment is best for you.

A mutual fund (MF) is one of the most popular types of investments. It is made up of a pool of funds from individuals and companies. Collectively, they are called investors.

The funds from investors are professionally managed by a fund manager, investing it in various types of businesses.

The fund manager abides by the strict regulations of the investment company and follows a structured and guided system on which securities to invest the funds.

The huge amount of money pooled from investors allows the fund manager to invest the money in more businesses. The funds yield returns over time.

The returns come from the difference between the price of shares when you bought them, and the current status of net asset value per share (NAVPS). When the price appreciates or increases, the investment earns more profit.

The fund manager monitors the growth of funds and provides investors with a detailed report on the status of their investments. Each MF investor pays for management fees including a certain percentage for the fund manager.

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There are four (4) common types of mutual funds:

1. Stock (Equity) Funds. The funds are invested in the stock market. This MF has the highest risk, with the highest returns

2. Balanced Funds. Investment in both stocks and bonds.

3. Bond Funds. Investment through shares in the stock market and government or reputable companies

4. Money Market Funds. Short-term investments (one year or less), invested in debt instruments.

How to get started

Online stock brokers such as COL Financial offer a minimum Mutual Fund investment amount of P5,000. Leading insurance companies in the Philippines such as Sun Life Financial and Philam Asset Management Inc. offer MF and provide options for investors on which type of MF to invest in.

A mutual fund is for people who have extra funds to invest, with little to no time in learning the stock market, or find it too risky.

Consider the time period in your investment because MF is best for retirement or long-term growth.

“For me a mutual fund has less risk compared to the stock market as you would have a diverse range of shares from different companies,” says AJ*, an MF investor for over two years. “The downside, though, is you would have to pay a management fee for it. I’d suggest mutual funds for those who doesn’t want to study the stock market, have extra income and would like to invest for the long term.”

How safe is it?

The professional fund managers work full time to ensure that your investments are in line with the agreement you initially signed. Compared to the stock market where there’s high risk with even higher returns, MF is a type of guided investment. You are entrusting your funds to professionals.

This, however, does not guarantee fixed returns. While funds are being entrusted to financial experts, the growth of your investment still depends on the everyday fluctuations of the stocks and bonds.

Mutual funds do not have maturity periods, and you may request to have your funds released. Know your rights as an investor and understand the agreement you’re going to sign up for.

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“I learned from personal experience that it is not easy to determine which among the so many mutual funds are the best to invest with,” says Don*, who has been investing in various mutual funds since 2007. In my case, the mutual fund that gave me the best return after six years is the one I least expected. Their office was small and not that impressive and they were not even well known back then.

“Surprisingly, the worst return I got for the same period was from a mutual fund with a very impressive office and which is, in fact, famous, not only locally, but also internationally.”

Find out which investment companies offer the best returns for your money. Entrusting your funds to an expert does not guarantee optimal security. Consider the risks, and get to know the type of mutual fund you would want to invest in. You may eventually consider taking some of your MF funds and buy shares in the stock market to gain more returns for your money. –Kristel Serran