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How do mutual funds work?

A mutual fund is a company that pools investors' money to make multiple types of investments, known as the portfolio. Stocks, bonds, and money market funds are all examples of the types of investments that may make up a mutual fund.

The mutual fund is managed by a professional investment manager who buys and sells securities for the most effective growth of the fund. As a mutual fund investor, you become a "shareholder" of the mutual fund company. When there are profits you will earn dividends. When there are losses, your shares will decrease in value.


Mutual funds are, by definition, diversified, meaning they are made up a lot of different investments. That tends to lower your risk (avoiding the old "all of your eggs in one basket" problem).

Because someone else manages them, you don't have to worry about diversifying individual investments yourself or doing your own record keeping. That makes it easier to just buy them and forget about them. That's not always the best strategy, however -- your money is in someone else's hands, after all.

Since the fund manager's compensation is based on how well the fund performs, you can be assured they will work diligently to make sure the fund performs well. Managing their fund is their full-time job!

Mutual funds can be open-ended or closed-ended. But many people consider all mutual funds to be open-ended, while putting closed-ended funds in another category.

"Open-ended" means that shares are issued in the fund (or sold back to the fund) whenever anyone wants them. With closed-ended funds, only a certain number of shares can be issued for a particular fund, and they can only be sold back to the fund when the fund itself terminates. (You can sell closed-ended funds to other investors on the secondary market, though.)

Load refers to the sales charges added to a mutual fund when you purchase it. The load charge goes to the fund salesperson as a commission and payment for their research services. Load charges can be up to 8.5 percent of the selling price and can be figured in as a front-end load (meaning you pay it when you buy the mutual fund) or a back-end load (meaning you pay when you sell the mutual fund).

Many mutual funds are no-load funds. Yes, that means there is no sales fee charged and the fund is direct-marketed so you can buy it without the help of a salesperson. With the wealth of information on the Internet today, it is certainly easier to make smart choices yourself to save money.

In addition to no-load funds, there are also funds that charge up to 3.5 percent as a sales fee. These are called low-load funds and can still be a good deal.

Mutual funds fall into three categories:
  • Equity funds are made up of investments of only common stock. These can be riskier (and earn more money) than other types.
  • Fixed-income funds are made up of government and corporate securities that provide a fixed return and are usually low risk.
  • Balanced funds combine both stocks and bonds in the investment pool and offer a moderate to low risk. While low risk may sound good, it is also accompanied by lower rates of return-meaning you risk less, but your investment won't earn as much. You have to decide how much risk you're willing to take on before you invest your money.
If you have invested in a college savings fund or a 401k account, chances are good that already own a few mutual funds. Mutual funds are great for long-term investments like these. You can also buy mutual funds directly from a mutual fund company.

Most of these offer no-load funds (or sometimes low-load funds). You can find lists of mutual fund companies on the Internet and purchase shares by simply filling out an application and mailing a check. Once you are a shareholder, you will receive statements telling you how the fund is doing as well as how much your own investment is growing. You can also set up monthly bank transfers to automatically buy more shares every month.

Remember to do your research and select a mutual fund that fits the level of risk you are willing to take with your hard-earned cash. Then just sit back and hope for the best!

For more information on investing and financial planning, check out the links on the next page.

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Here's another article about the subject:

How Mutual Funds Work

Every mutual fund has a goal - either growing its assets (capital gains) and/or generating income (dividends) for its investors. Distributions in the form of capital gains (short-term and long-term) and dividends may be passed on (paid) to shareholders as income or reinvested to purchase more shares. For tax purposes, keep track of your distributions and cost basis of purchased/reinvested shares.

Like any business, mutual funds have risks and costs associated with returns. As a shareholder, the risks of a fund and the expenses associated with fund's operation directly impact your return.

Returns

As an investor, you want to know the fund's return-its track record over a specified period of time. So what exactly is "return?"

A mutual fund's return is the rate of increase or decrease in its value over a specific period of time usually expressed in the following increments: one, three, five, and ten year, year to date, and since the inception of the fund. Since return is a common measure of performance, you can use it to evaluate and compare mutual funds within the same fund category. Generally expressed as an annualized percentage rate, return is calculated assuming that all distributions from the fund are reinvested.

Since average returns can sometimes "hide" short-term highs and lows, you should evaluate returns for a time period of several years-not just one year or less. A fund that has a high return in one year may have experienced losses in other years-these fluctuations may not be apparent in its average return. While a fund's return shows its track record, keep in mind that past performance is no guarantee of future results.

When using returns to compare funds, always use net returns. Net returns are the true returns of both load and no-load funds after deducting all costs and expenses.

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Mutual Fund Related News: New Mutual Fund Rules Won’t Limit Advice

New Mutual Fund Rules Won’t Limit Advice
By RON LIEBER

In today’s New York Times, our colleague Edward Wyatt has an article about the Securities and Exchange Commission’s efforts to rid the mutual fund industry of 12b-1 fees, which can cost investors hundreds or even thousands of dollars if they hang on to a sizable investment for long enough.

The S.E.C.’s proposal would limit the fees in a number of ways, and apparently, some lawyers who work for fund companies think this could lead to consumers getting less advice from their advisers.

I don’t buy it for a minute.

Here’s how the fund industry’s argument goes, per Mr. Wyatt’s article:

Robert M. Kurucza, a law partner at Goodwin Procter, which represents some of the largest fund companies, and who served as an assistant director of the S.E.C. division that oversees mutual funds, said that if the proposals were adopted, “they could have extraordinary ramifications in the marketplace for how mutual funds are sold and marketed.”

Not all of those ramifications are necessarily good, Mr. Kurucza said. In a world where investors are increasingly responsible for managing their retirement assets, intermediaries can give advice on asset allocation and performance. Limiting the amounts of money available to compensate those advisers could have the unintended consequence of limiting the advice available to investors, he said.


This is only true, however, if advisers can’t think of any way to make money other than by collecting fees from fund companies in exchange for pushing the fund firms’ high-priced investments on consumers.

There are plenty of financial planners who already work on a fee-only basis, meaning they make money only by charging customers directly for their services. You can pay these professionals by the hour or pay them a percentage of your assets under management each year or some other way.

Some advisers argue that it’s cheaper for many customers to let fund companies compensate the advisers for their time via mutual fund fees while those customers pay nothing for their advisers’ time. Perhaps. But the S.E.C. notes that some advisers are collecting fees on funds decades after they first sold them. It’s certainly possible that that continuing revenue stream could affect whether an adviser decides to move a customer out of those funds.

Over time, I think more consumers will gravitate toward paying simple, transparent fees for financial advice to people who earn no money from any of the firms that provide investments.

So how many of you know exactly how your financial adviser gets compensated? And how many advisers who collect revenue via these sorts of fees think the S.E.C.’s proposal is unfair or will lead to fewer people getting financial advice?

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Philippines Mutual Fund Updates: BSP keeps key interest rates steady

This is an article from Manilatimes.net. Friday, 16 July, 2010. Please read...

BSP keeps key interest rates steady
By Lailany P. Gomez reporter

The Bangko Sentral ng Pilipinas (BSP) on Thursday announced it would shift to a medium-term inflation target, as it kept policy rates steady for the ninth time on the back of manageable price increases. In a press briefing, BSP Governor Amando Tetangco Jr. said the Monetary Board decided to keep the overnight borrowing or reverse repurchase (RRP) rate at four percent and the overnight lending or repurchase (RP) rate at six percent. The interest rates on term RRPs, RPs and special deposit accounts were also left unchanged.

Tetangco said the Board’s decision was based on its assessment that the current monetary settings continue to be appropriate, given the favorable inflation outlook and on-target inflation expectations.

“Recent surveys also show that inflation expectations remain firmly anchored within the inflation targets over the policy horizon,” he said.

Earlier, the BSP revised its inflation forecast this year to 4 percent from the original 4.7 percent, and for 2011 to 3 percent from 3.6 percent.

Tetangco however said the Board also noticed inflation pressures such as stronger-than-anticipated domestic economic activity and buoyant consumer and business sentiment.

“The BSP will continue to closely monitor emerging price pressures and coordinate as necessary with concerned government agencies on possible measures to address supply side concerns,” he said.

Other upside risks include rising liquidity and strengthening credit activity, recovering global commodity prices, power rate hikes and declines in agricultural output due to adverse weather conditions.

In a separate statement, the BSP announced the approval by the inter-agency Development and Budget Coordinating Committee of a medium-term inflation target to promote a long-term view on inflation and increase the predictability of monetary policy.

The central bank said it has shifted to a fixed inflation target of between 3 percent and 5 percent for 2012 to 2014 from a variable annual inflation target.

Deputy Governor Diwa Guinigundo said the fixed medium-term inflation target will also help anchor inflation expectations and support consumption and investment by fostering greater predictability in economic decisions.

“This target is appropriate given the consistency of the latest inflation forecasts with the desired inflation path, the private sector’s inflation expectations and growth prospects of the economy,” he said.

“This is something that the BSP decided for itself. This will also help the market better appreciate the formulation of monetary policy. Businessmen can plan ahead or can assess,” he added.

The BSP however would continually review its medium-term target to align it with the latest macroeconomic conditions.

More companies borrowing in 2H
Adelbert Legasto, Bank of the Philippine Islands (BPI) executive vice president and asset management head, said more companies would likely borrow in the second half of the year following the BSP move to hold onto existing interest rates.

“Borrowing may start to move up as far as the companies are concerned because borrowing at lower interest rates makes them decide to do investments in business that can give them better yields than the borrowing rate,” Legasto said.

He said second-half borrowings however would be lower than in the first six months of the year, as the majority of big companies already finished their fund-raising activity.

“In terms of number, there’ll be more activity in the small- and middle-market level,” he said.

The executive said equities would outperform bonds this year because the former would have a bit more upside, as stocks have yet to return to pre-crisis price levels.

“Bonds will be more to address your fixed-income requirement, which is more conservative so you don’t look at very high returns in bonds compared to equity,” he said.

In this regard, ALFM, a mutual fund that BPI manages, is placing its bets on the power and real estate sectors to lead trades in the second half.

“Part of it will be because of the real estate investment trust and there’s a lot of activity going around, all the buying and selling. Since interest rates are down, people will have more money to buy properties,” Legasto said.

BPI manages the ALFM Family of Funds, which had P470 billion in assets. ALFM is comprised of ALFM Peso Bond Fund, ALFM Dollar Bond Fund, ALFM Euro Bond Fund, ALFM Growth Fund, Philippine Stock Index Fund and ALFM Money Market Fund.

This year, ALFM sees a 14-percent growth in its aggregate net asset value despite concerns over the global economy.

“We are still on track as far as achieving those projections are concerned,” said Legasto.

In 2009, ALFM grabbed 45 percent of the P68.7 billion mutual fund industry followed by Philamlife with a 23 percent share and Sun Life at 22 percent.

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Philippine Mutual Funds News: BPI sees 14% rise in mutual-fund value in 2010

I read this article/news from businessmirror.com. Find out how BPI sees 14% growth in this year mutual fund market in the Philippines.

BPI sees 14% rise in mutual-fund value in 2010
Written by Erik dela Cruz / Reporter (Thursday, 15 July 2010 21:56)

THE ALFM Family of Funds, the largest group of mutual funds in the Philippines and managed by BPI Investment Management Inc. (BAMI), will likely post an average 14-percent growth in net-asset value this year given improved investor sentiment, the funds’ managers said on Thursday.

Adelbert Legasto, executive vice president and head of asset management and trust group at the Ayala Group’s Bank of the Philippine Islands, painted a rosy outlook for ALFM mutual funds this year and was particularly bullish about yields from the equities market.

BAMI is a wholly owned unit of BPI, which ended the first quarter with total trust assets of P447 billion. Assets under management by BPI have grown to around P460 billion, according to Legasto.

“The market conditions are very ripe for investors to start looking for better returns as interest rates have started to move down and offer very low yields,” he said at a news briefing. “You can actually get better yields when investing in mutual funds.”

Legasto said that among asset classes, equities were expected to be the best performer. “Fundamentals are pretty good yet prices are still low.”

Given the improved bottom lines of listed companies, he said investors should get better yields in the equities market than in the bond market. He also noted that some “very conservative” investors have actually shifted into the mutual fund business because of the low interest rate environment, which has resulted in reduced yields particularly from bank deposit products.

The ALFM funds continued to achieve positive returns for investors last year, Legasto said, “while keeping risks appropriately managed and minimized.”

The BPI-managed mutual funds are the ALFM Peso Bond Fund, ALFM Dollar Bond Fund, ALFM Euro Bond Fund, ALFM Growth Fund, Philippine Stock Index Fund and ALFM Money Market Fund. He said these funds cornered a combined 45-percent share of the P68.7-billion mutual fund industry, which grew 14.5 percent last year.

The industry suffered a 30-percent contraction in 2008 when investor sentiment dropped amid the global financial crisis.

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The Truth About Mutual Funds

By Alvin C. Malasig (The Philippine Star) Updated July 16, 2010 12:00 AM

MANILA, Philippines - Most of us would usually want to have a substantial amount of cash in the bank. An average person will often set aside a part of his earnings in a bank account. For those who have more money to spare, buying a piece of real estate will likely be an option.

But apart from these traditional investment options, there are new investment schemes available to us that are still relatively untapped and little known to most Filipinos. One of them is mutual funds.

Now what are mutual funds? Mutual funds are a collective investment scheme wherein money from so-called “retail investors” are pooled in a fund which is then invested by professional fund managers in securities such as bonds and stocks, among others. The fund managers in turn earn money by deducting a fee from your investment.

Just like any form of investment, venturing into mutual funds has its pros and cons which any would-be investor has to know before putting in that hard-earned money. Let me mention a few.

Advantages:

1. Multiple Options

As they say, never put all your eggs in one basket. This adage can never be truer when it comes to investments. None of us would want to lose our life-savings in a single sweep. With this in mind, mutual fund companies offer various investment options tailor fit to an investor’s appetite for risk.

For more daring investors, there are all-stock investment options, meaning the entire fund is placed in stock market investments. This is meant for investors who have a good appetite for risk and have a keen sense on stock market movements but who do not have the time to personally buy and manage their investment portfolio.

This type can potentially give you higher returns if the stock market is moving in the right direction. But your losses can likewise be greater if it’s not. In order to cut the risks, the fund is usually invested in several companies with the hope that some of them will buck the trend in case of a downturn.

Conservative investors who want the certainty of a bank savings or time deposit but slightly higher interest yields than what traditional bank accounts can give, an all-bond option is the right choice. In an all-bond option your money will be invested in government-issued securities. You are in effect lending your money to either our own government and its subdivisions or a foreign one.

Since they are guaranteed by a government, the risk of default or non-payment is considerable low. You can expect that the debt owed to you will be paid on its due date, just as you can expect the sun to rise in the east every morning. The risk that a country will collapse is way too remote especially the stable ones unlike corporations which can be forced by economic forces to close down. But this type expectedly, will offer a lower return for your investment.

Those who want a more balanced investment portfolio, mutual fund companies offer a mixture of stocks and bonds that are not as risky as an all-stock investment but offer a higher return than an all-bond option.

2. Professionally managed investment portfolio

Your money will be handled by professional fund managers who watch and study the markets on a daily basis. It is their bread and butter after all. You can rest assured that your money is in the hands of experts in the field who will make the right decisions on your behalf thus making investing hassle-free.

3. Higher yields

Unlike traditional bank accounts, mutual funds, regardless of type, have the potential to give you yields that are greater than our country’s inflation rate. Bank deposit rates are normally lower or at par with our inflation rate. This will, in effect negate whatever earnings that you have made. Your money will only grow in absolute terms but its purchasing power would probably stay on more or less the same level as when you first made the deposit.

Disadvantages:

1. Risk of loss

Compared to cash deposits in reputable banks, you can lose money in mutual funds depending on economic or business conditions which are beyond any investor’s control. Your investment is at the mercy of market forces which can either make or break you financially.

As an investor, you must also rely on your own wise judgment on whether to keep the investment or pull out of it depending on how external factors that can affect it are moving. At the end of the day, it is your money so you cannot completely rely on the decision of fund managers.

2. Unpredictability of performance

Mutual fund companies would normally show you a good interest yield trajectory in the past years. But this is no guarantee that your money will really earn a very good amount of interest. It would be best for any investor to choose a reputable company which puts its assets in good investments so that you will be assured of decent returns or at least prevent a huge loss.

3. Expensive

Since you’re asking mutual fund companies to manage your money in your behalf, you can expect that they will charge you a good fee for their services, which is but fair unless it is downright exorbitant. Choose a company which will charge a reasonable amount and discloses all of the charges before you entrust your money to them.

Remember that a mutual fund investment is not a get-rich-quick scheme. For maximum yields, it must be a long-term investment otherwise you will see no appreciable interest in your investment and whatever you earned might just end up being eaten up by fees.

Mutual funds are a good alternative to traditional investments for as long as you have the foresight and ample knowledge about how it works. They are a great tool for wealth creation. But as in any other undertaking, you just have to do things the right way when you decide to give it a try.

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Mutual Funds: What Is Mutual Funds?

Mutual Funds Definition. Here's what I found from wikipedia.org

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals).

The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective. In the U.S., a fund registered with the Securities and Exchange Commission (SEC) under both SEC and Internal Revenue Service (IRS) rules must distribute nearly all of its net income and net realized gains from the sale of securities (if any) to its investors at least annually. Most funds are overseen by a board of directors or trustees (if the U.S. fund is organized as a trust as they commonly are) which is charged with ensuring the fund is managed appropriately by its investment adviser and other service organizations and vendors, all in the best interests of the fund's investors.


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