Mutual Funds Investing: Getting Started with the Basics

Mutual funds investing frequently asked questions are addressed in this article, viz:

  • What is a mutual fund?
  • What are the types of mutual funds?
  • What is mutual funds investing?
  • How should it figure out in my financial plan?
  • What are the advantages of mutual fund investing?
  • What are the disadvantages of mutual fund investing?
  • How should I choose which mutual fund to invest?
  • How do I buy and sell mutual funds?

What is a mutual fund?

A mutual fund is basically funds pooled from individual investors professionally managed by a mutual company. The mutual fund company invests the pooled money in stocks, bonds or a combination of stocks and bonds. Understanding the mechanics of a mutual fund is basic to mutual funds investing.

A mutual fund company is an open-end fund investment company. The other types of investment companies are closed-end fund and the unit investment trust fund (UITF).

What are the three main categories of mutual funds?

There are three types of mutual funds depending on where they are invested.

  1. The equity fund are invested in stocks publicly listed in the Philipine Stock Exchange. Its basic difference from direct stock investing is that the mutual fund company chooses which stocks or combination of stocks to invest based on their market research. In effect, the company decides the diversification strategy for the mutual fund investor.
  2. The bond fund are invested in bonds and government securities. Bonds are considered low risks investments and is the preferred investing strategies by more conservative investors.
  3. The balanced fund are invested in both equities (stocks) and bonds. The combination of bonds and stocks reflect the investment decision of the mutual fund company.

What is mutual fund investing?

Mutual funds investing is in effect, investing in any of these types of instruments: equity fund, bond fund or balanced fund.

What are the advantages of mutual fund investing?

The upsides are diversification, professional management, affordability and liquidity. Owning a mutual fund is more diversified than owning individual stocks or bonds.

The mutual company selects investment vehicles based on research and monitor their performance. This is a key advantage if you do not have the expertise, time and patience to perform these tasks.

Mutual funds investing is affordable. With PhP5,000.00 you can already start your initial investment.

Liquidity is an added advantage as you can redeem your shares anytime. However, you should take into consideration of the exit fees that the mutual fund company charges.

What are the disadvantages of mutual fund investing?

Lack of control is the main downside of investing in mutual funds. You don’t have the liberty to choose which stocks or bonds to invest.

Entry and exit fees and other charges could diminish your earnings from your mutual funds investments. As with other investment choices, mutual fund investing involves risk. Price uncertainties affects investment returns.

How should I choose which mutual fund to invest?

You could narrow down your decision with the following steps:

  1. Figure out what you are saving for and the timeline of your saving goal. Is it for children’s education? retirement? or for a major purchase? Knowledge on the historical trends of net asset value per share (NAVS) of different mutual fund categories across mutual fund companies featured in the site of ICAP can give provide you some insights. My first mutual fund investment was an equity fund with Philequity Fund Management Inc. I didn’t have any savings goal at the time. I just wanted to get a feel of what mutual fund investing is all about. I chose Philequity because of its longevity in the industry. My second mutual fund investment was a balanced fund with First Metro Asset Management Inc (FAMI). I chose it because it can be redeemed in six months.
  2. Assess your risk tolerance. Mutual companies administer questionnaire to size up what type of investor are you and would recommend the type of mutual fund which matches your tolerance level.

How do I buy and sell mutual funds?

There are many ways you can do buy and sell of mutual funds. You can deal directly with mutual fund companies through their websites. You can also do it with brokers, banks, financial planners and insurance agents. In my case, I buy and sell mutual through IMG where I am licensed broker . I feel comfortable this way because live persons can personally guide you in your mutual funds investing decisions.