The Basics of Investing In Mutual Funds

Updated: March 5, 2020

Are you interested on investing in mutual funds? Do you want to know how mutual funds work? What are the advantages and disadvantages of investing in mutual funds?

If it’s your first time to hear about mutual funds, then you might be asking what they are. In very simple terms, a mutual fund is a pool of money from many different people (which could be hundreds, even thousands).

This money is collected by a company which acts as the mutual fund manager, who then invests the money in stocks, bonds, the money market, and many other locations.

In other words, investing in mutual funds is like entrusting your money to someone in the hope that he can make your money grow better than you can. Of course this someone is not just some ordinary Joe, but one that has years of experience in investing.

mutual-funds

Advantages of Investing in Mutual Funds:

  • Professional management – your mutual fund manager does all the research, selection and monitoring of investments
  • Diversification – mutual fund investments are spread across a wide range of companies and industry sectors which lowers your risk if a company or sector performs badly
  • Affordable – mutual funds require relatively low initial investments, in fact, some mutual fund companies only requires P5,000 to start
  • Liquidity – mutual fund investors can redeem their shares at the current net asset value (NAV) of their investment easily and at any time

Disadvantages of Investing in Mutual Funds:

  • Uncertainty of returns – unlike fixed-income products (such as time deposits), your investment does not guarantee a positive return, you can lose money, this fact makes mutual funds a low to medium risk investment instrument
  • Lack of control – investors cannot directly influence which securities the fund manager should invest in, thus, you’re left just “sitting at home” and hoping that your portfolio adviser makes good investment decisions
  • Costs and fees – sales commissions and redemption fees are applied to your investment if you decide to redeem your mutual fund investment, this could significantly affect your expected returns
  • Investment horizon – mutual funds are not get rich quick schemes, it’s a medium to long term investment, people who have earned significantly in mutual funds have been in it for several years already

How do you start investing in mutual funds?

In my beginner’s guide to investing, I mentioned several things you should consider before investing in any type of instrument. When it comes to mutual funds, the same principles apply.

In a nutshell, there are five basic steps you need to do:

  1. Define your objectives. Be clear about why you want to invest. Is it to have the money to buy a car? To start a business without needing merchant cash advance companies? For your retirement?
  2. Assess your financial situation. What are your current assets and liabilities? Do you already have an emergency fund?
  3. Determine your investing capabilities. How much money are you exactly willing to invest? For how long? How much of that can you afford to lose?
  4. Look for a mutual fund company that can meet your requirements and objectives. Talk to their financial adviser and seek consultation.
  5. After buying shares in a mutual fund, commit some time to monitor your investment and learn more about mutual funds.

Remember that all these are just basic knowledge. If you’re really interested to learn about mutual funds, I suggest some due diligence on your part. Your investing IQ and the probability of a successful investment portfolio highly depends on how much you know about your chosen investment.

One last note, it’s important to know that your money that’s invested in a mutual fund is not protected by the Philippine Deposit Insurance Corporation or PDIC. In the Philippines, mutual funds and their investment advisers are regulated by the Securities and Exchange Commission (SEC) and not by the Bangko Sentral ng Pilipinas (BSP).

Here’s a list of Mutual Fund Companies in the Philippines.

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Photo credit: Luc Melanson

39 comments

  1. Hi! I like your inputs regarding Investing. Personally, for mutual funds, I really don’t prefer this kind of investing because this is like “playing it safe” and being safe mean slow earnings. I don’t want to sound aggressive, but since, to be able to be successful in mutual funds needs lots of Investing and Financial skills, not to mention the due diligence… why not concentrate on one sole investment?

    Anyway, this is another option though to manage our financials….

    Salamat Fitz for your good articles. Galing!

  2. Hi there. Just like to give more insights on the following:

    # Liquidity – mutual fund investors can redeem their shares at the current net asset value (NAV) of their investment easily and at any time

    – its actually the next computed NAVPS and not the current. Usually NAVPS are published the next day. So if you plan to redeem your investment today and submitted before 12:00, your NAVPS will not be that of yesterday but today’s computed NAVPS which are usually posted the next day.

    Costs and fees – sales commissions and redemption fees are applied to your investment if you decide to redeem your mutual fund investment, this could significantly affect your expected returns

    – Usually called the sales load. Comes in 2 types, front end load or back end load. This usually ranges from 1%-5% depending on the mutual fund company. There are even those that do not charge any loading fee if your money will not be withdrawn in the next 5 years.

  3. In investment, risk is a factor that you cannot set aside.It is really important to know your risk tolerance before investing and I agree with what you have said that mutual fund is not a good idea for “get rich quick” investors as this kind of investment grows over a period of time.

    What I really liked about your post is that you provided an unbiased insight about mutual funds by presenting two sides of the coin. Not only that, you have also guided your readers on how to invest in mutual funds by offering the basic steps they need to kick start their investment career.

    Nice post. You will be hearing a lot from me.

  4. hi fritz ask ko lang kasi may 5 MF ako sunlife, philam, gsis at save more ako pero di naman malakihan ang pinasok ko doon kung may sobra lang ako at minsan lang ako mag dagdag ng investment ano maganda tanggalin ko yun iba o maintain ko lang yun iba at mag concentrate nalang ako sa iisa need your advice thanks pls email me

  5. Hi Fritz… we have not received any earnings from our mutual funds for the past two years.. the market is picking up now and we have extra money to invest…should we invest in mutual funds or should we just deposit in the bank…any suggestions?

  6. @caloy
    Do you need the money? If not, then just let your money stay there. In my opinion, it’s good that you have several MF, at least your money is somehow diversified.

    @girl
    I’m a big fan of diversification, so I would naturally say that you should find other instruments to invest in because you already have mutual fund investments.

    A time deposit would be a good place to put your money but also consider other investments like stocks and bonds or perhaps starting a business.

  7. Looking for a good investment? Try mutual funds « loQal – Business and Finance | Philippines says:

    […] reaching a targeted amount, the partners in mutual funds entrust their money to the fund manager. Fitz Villafuerte wrote in his blog that fund managers are not your average financial experts. These are people who have had years of […]

  8. Just want to ask about “The LGN Revolution”, is this really a Real Business opportunity?

  9. Investing is my way of earning money both online and offiline, right now i am into venture capital.”-*

  10. One last note, it’s important to know that your money that’s invested in a mutual fund is not protected by the Philippine Deposit Insurance Corporation or PDIC.

    -May I ask why?

  11. @Popoy
    Your money in a savings account, for example, is currently covered up to P500k by the PDIC. If the bank suddenly closes, PDIC will pay back up to P500k of your money that’s left in the bank as a deposit.

    For mutual funds, if the MF company suddenly closes down, then that’s it for your money. No entity will pay it back to you.

  12. me and my friends have been into venture capital investments and so far the income is great.“`

  13. […] online. I also have a number of books on financial literacy. For a start, you can also check Fitz Villafuerte’s blog, which provides lots of useful information on mutual funds, business and personal […]

  14. Hi Fitz,

    I am a first time MF investor so I’m a bit hesistant. Have you heard of FAMI (First Metro Asset Managament, Inc.)? They have a very low initial investment amount (5,000php) but how will I know if I will be investing in the right MF. I have their prospectus but I cannot understand it. Any idea if this will be a good company to start investing in?

    Thanks and more power! Your blog is really a source of financial literacy!

  15. Hi Fritz, nice items on how to invest in mutual funds. Re PDIC backed bank deposits, the amount covered is only up to 500K & after undergoing a tedious & long process like the BANCO FILIPINO & LBC BANK EXAMPLE. In excess of 500K, PDIC will not cover it. Of course, before investing your hard-earned cash, you can examine the track record of the mutual fund company you are investing in, its capitalization, the ASSETS UNDER MANAGEMENT of said company. Also, in withdawing your invested funds, it can be withdrawn anytime with cutoff time at 12 noon of the day you will withdraw. Even if the applicable NAVPS is computed the next day if beyond cut-off time, it is just a minor difference. There is an exit fee depending on the OPTIONS you choose at the time you initially invested but there is no sales commission deducted when you redeem. In an annual basis, the returns of the funds are better than the inflation rate except in MONEY MARKET FUNDS. Compared to banks, where the average returns are from 1 to 3% per annum before taxes,taking into account the inflation rate, you will still be in the negative. Right now there are trillions of pesos sleeping in the banks, losing their nominal value due to inflation costs, and the banks are the ones earning because they place your money in high-yield investments like MUTUAL FUNDS where they earn 20 to 30% yearly & just pay you the maximum 3% & pockets the rest for further investing or for capital expenses like fat management fees or build big buildings to house their offices to attract more depositors.

    EFI – MUTUAL FUND ADVISOR
    09228129180/023473687

  16. Hi Efi, I was able to attend a seminar on financial management and during that seminar I heard from our speaker about this mutual fund. In past days I just ignore about it, but when I heard from my officemate that she has a frined who invested on Mutual Funds,I just get interested with it but reading some articles from internet about it, i cant deeply understand about it. So, as someone who wanted to invest to the said funds, how can you help me as beginner to fully understand the flow or what should I do first before investing to this.

  17. Im planning to invest my savings, i have 1.5M in my savings account, excluding my emergency fund, i plan to invest 500k at bdo balanced uitf, 500k at metrofirst balanced fund and another 500k at philam fund(balanced) i dont have any plans of withrawing my savings for the next 5-10 years. Im afraid of taking risks thats why im not into equity, any suggestions? Thanks.

  18. Hi Den, before you invest your savings. You should first define your investment objective. Where do you plan to use the money for in the future? That will dictate where is the best place to put your money.

  19. Great post, it helped me clear off some of the misconceptions about Mutual Funds that I have held for quite some time. Professional management is what attracts me to this investment avenue and if it all goes right, I don’t really mind the fees and other overheads.

  20. parang sa tingin ko risky din, kasi sinasabi nila kagad na pede ka malugi.you have to be ready tlga whatever will going to happen with your investment.walang kasiguraduhan pa din.tama yun frend ko,bumili na lang sya ng properties.

  21. Hi Fritz,

    I just want to more about MF. I now have in FAMI, do you have any suggestions for other MF companies that I can invest to?

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