Mutual Funds > Advantages

Advantages of Mutual Funds


Professional Management

One of the main attractions of mutual funds is the fact that it affords its investors, particularly the small ones, the services of full-time professional managers whose focus is to analyze the various investment products available in the market and actively select those that would give the best possible returns to the fund and its shareholders.


Low Capital Requirement

Direct investments usually require substantial capital. The minimum investment amounts for Treasury Bills and commercial papers, for instance, range from Php100,000.00 to Php1,000,000.00 depending on the bank or investment house you are dealing with. This also holds true for stocks because while an investor may be able to buy one “lot” (shares are sold in board lots of 10 to 1 million shares depending on the price at which these shares are traded) for as low as Php1,000.00 to Php5,000.00, he may not find a stockbroker who will service his account because they prefer to deal with high net worth individuals (rich people in layman's terms) or at least with people who have substantially more than just Php5,000.00 to invest. In contrast, most mutual funds in the Philippines require a minimum initial investment amount of only Php5,000.00 and minimum additional investments of Php1,000.00.


Diversification

There is a saying that goes, “Do not put all your eggs in one basket.” This is especially true in the world of investments which is full of uncertainties. There is no such thing as a “sure” thing. An important investment principle that requires holding several securities to reduce the risks associated with investing in individual securities is called diversification. When people invest in a mutual fund, they achieve instant diversification because the fund is required by law to invest in a wide array of securities.


Liquidity

Liquidity is the ability to readily convert investments into cash. Other investment products require investors to find a buyer so that he can liquidate his investment. That is not the case with mutual fund shares because the fund itself stands ready to buy back these shares at the prevailing Net Asset Value Per Share. While the law provides that redemption proceeds must be given within seven (7) banking days from the date of the redemption request, most funds are able to pay the redemption proceeds within 2-3 banking days. Mutual funds are, therefore, considered very liquid investments.


Safety

Safety is a very important consideration for most investors. Sometimes even more important than potential returns. Nevertheless, mutual funds are highly regulated by the Securities and Exchange Commission under the Investment Company Act and its implementing rules. They are prohibited from investing in particular investment products and engaging in certain transactions. They also have to submit regular reports to the SEC as well as to their shareholders. All of the fund's assets must be held by a highly reputable commercial banks for safekeeping.


Potentially Higher Returns

Because a mutual fund is managed as a single portfolio, it is able to take advantage of certain economies of scale. For instance, with its billions under management, it can negotiate for lower stockbrokerage fees or command higher interest rates on fixed-income investments. In the end, however, it is still the investment adviser who really makes the big difference between making direct investments and investing in mutual funds because very few individual investors can match the experience and skill of full-time professional fund managers.


Convenience

In other countries, mutual funds can be purchased directly through a broker, financial planner, bank or insurance agent, by mail, over the phone and increasingly over the internet. The popularity of mutual funds in the Philippines is fast catching up. It may be a matter of time for this level of convenience to be a reality in the country. Funds also offer a variety of other services, including monthly or quarterly account statements, tax information, and 24-hour phone and computer access to fund and account information.


Tax-Free

Gains realized by investors upon redemption of their shares in a mutual fund have been excluded from the definition of gross income effective January 1, 1998 and are, therefore, not subject to personal income tax (R.A.# 8424).