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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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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