Mutual funds: Can you trust them?
MANILA, Philippines – Everyone wants to gain financial freedom. But is having savings enough? Today, Filipinos are starting to learn to invest, too. (READ: The silent thief)
Why? Historically, investments such as stocks and bonds have outperformed banks in terms of interest rates. It means that those who started investing 10 or 20 years ago now have much higher earnings compared to those who simply kept their money in bank deposit accounts.
But the truth is that investing is not “magic money.” It’s a full-time effort. Making trades or observing market movements requires rigid financial education. Not all Filipinos have the time – or tenacity – to watch the money markets everyday. If you’re not careful, you can lose all your hard-earned money in one sweep.
This is where products like mutual funds (MFs) come in. By entrusting your money to professional fund managers, you pool your money with other investors, creating a bigger capital that can be invested in different channels. The fund managers then put your money in the market and make it earn for you.
However, entrusting your money to fund managers isn’t an excuse not to do your homework. You still need to figure out your tolerance for risk and have a working knowledge of how MFs earn. Here are a few things before you get started:
What’s in it for me and for them?
An investor earns income from MFs through asset appreciation, interest and dividends. When a fund performs well the value of the fund grows such that when an investor sells his/her shares in the said fund, he earns a profit.
Many Filipinos are already investing without knowing it. Pag-IBIG Fund – a mandatory benefit for employees – is actually a type of mutual fund. The fund guarantees the refund of member's total accumulated savings, which consists of the member's accumulated contributions, the employer counterpart contributions, if any, and the dividend earnings credited to the member's account upon membership maturity, disability, or retirement.
In a typical mutual fund, the refund of investment is not guaranteed. Over time, however, the interest or share price can even exceed the investor’s capital amount. For example, a capital of P50,000 invested this year can already be worth millions in 20-30 years, basing on the past performance of funds in the Philippines.
Some types of mutual funds come linked with wealth protection products, such as life insurance. These do not guarantee return of capital, but they can protect a portion of an investor’s wealth from certain types of emergencies, like death or disability.
It’s still a smaller pool, but not for long.
Mutual fund products in the Philippines are few – but growing. According to Bloomberg.com, there are 150+ mutual fund products registered in the country. In North America, there are over 10,000.
There are various types of mutual funds available in the Philippines such as:
1. Fixed-income funds (bonds)
2. Equity funds (stocks)
3. Balanced Funds (combination of stocks and bonds)
4. Money market funds
In choosing which type of MF to invest in, one must consider several factors.
First, you choose a mutual fund based on the integrity and track record of its fund manager, your risk profile, and your time horizon. Kidding aside, you might think of it as entering a relationship: you have to know what your type is, what your own personality is, and whether or not you can commit long-term.
You have to read news about the fund’s leaders and how they are regarded in the industry. Don’t fall for scam funds that promise a very specific amount in X years. The most reliable fund managers should take care of your wealth without over-promising anything.
You should also choose a fund that is aligned with your risk profile. If you are conservative and don’t think you can leave your money invested long enough, you should probably not go for equity funds as these tend to be more volatile. You may want to consider a bond fund instead. But if you want to maximize your earning potential and don’t mind short term fluctuations in exchange for higher returns and are willing to leave your investment for 5-10 years, an equity fund may be best suited for you.
Start now. But look further into the horizon.
It’s not “when” to invest; it’s “how long.” Time is an investor’s most important asset. Even if you choose not to spend your money, it’s being eaten up by inflation – the natural swell in prices of goods that decreases your money’s value over time.
A simple savings account will not protect your money from inflation. With mutual funds, returns may be volatile in the short-term, but they’re almost always higher than the inflation rate over the long term.
The longer an investor holds his/her money in a fund, the greater its potential to earn. That’s why investing in mutual funds is a good way to prepare for retirement or long-term dreams.
Aside from being thrifty and observant, patience is another virtue of those who are financially fit. – Rappler.com
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