Mutual Funds > Basics

Mutual Funds


Basics


Definition of Terms:


MUTUAL FUND

A Mutual Fund is an investment company that pools together money from different investors and invests it in a diversified portfolio of financial instruments in accordance to its objectives. These funds are actively managed by full-time, professional fund managers. Whose job is to seize market opportunities within well-managed risk parameters.


NAVPS (Net Asset Value Per Share)

Net Asset Value Per Share also known as “NAVPs”, is the computed price per share of a Mutual Fund. NAVPS is like the stock price of the Mutual Fund since it denotes the value of one share of the Mutual Fund Company. Mathematically speaking, it is the total value of the company divided by the total number of outstanding shares.

The NAVPS of Mutual Funds are calculated daily after the market closes.


DIVERSIFICATION

The practice of investing broadly across a number of different investment instruments, securities, industries, or asset classes to reduce risk. Diversification is a key benefit of investing in Mutual Funds and other investment companies that invest in a number of financial assets or portfolios. This concept also allows investors to make more money as it is able to participate in the earnings potential of many instruments.


FUND MANAGER

A person employed by the Mutual Fund Company to invest its assets in accordance with pre-determined objectives of the Mutual Fund. He is responsible in making decisions related to investing, re-investing and trading of securities for the Fund. A person in this position must handle the funds in a way consistent with the stated goals while working to maximize returns to benefit investors. People who work in these positions generally have extensive experience in the financial industry, including experience at various levels of the fund management hierarchy.


Types of Mutual Funds:


Money Market Funds

Money Market Funds invest mainly in short-term instruments maturing in less than one year. These funds invest in short term debt obligations such as Treasury bills, certificates of deposit, and commercial papers. The main goal of Money Market Funds is the preservation of the investor’s principal. They are widely regarded or considered as “conservative as bank deposits” yet can provide higher yields.


Bond Funds

Bond Funds invest in debt instruments issued by the government and or corporations. The exact type of debt the fund invests in will depend on its focus, but investments may include government, corporate, municipal and convertible bonds, along with other debt securities like mortgage-backed securities. One should note, however, since the Fund is spread out among many bonds, the overall risk is usually lower.


Equity Funds

Primarily invests in the stock market. An Equity Fund is a type of Mutual Fund that buys ownership in different businesses (hence the term: "equity"). Depending on the investment strategy of the fund managers, the Fund may be invested in blue-chip companies, growth stocks and even speculative issues. The objective of an Equity Fund is long-term growth through capital gains, although historically dividends have also been an important source of total return. Specific Equity Funds may focus on a certain sector of the market or may be geared towards a certain level of risk.


Balanced Funds

Balanced Funds invest both in the stock market and fixed-income or debt instruments. The objective of these funds is to provide balance in terms of safety, income and capital appreciation. The strategy of Balanced Funds is to invest in a combination of fixed-income and equities. A typical Balanced Fund might have a weighting of 60% equities and 40% fixed-income. The weighting might also be restricted to a specified maximum or minimum for each asset class.


Advantages:


1. Mutual Funds Offer Diversification

The beauty of a Mutual Fund is that you can buy and obtain instant access to various individual stocks or bonds. This is because you are joining in a big pool of assets that have the capacity to participate in different instruments while being managed by full-time fund managers. Unfortunately, this is not the case if a person without technical know-how would be investing on his own – it will be a lot more costly and by trying to do so may expose you to more potential risk or volatility of certain investments.


2. Mutual Funds are Professionally Managed

Many investors do not have the resources, expertise or the time to buy stocks. By investing in Mutual Funds, financial experts like fund managers and analysts wake up each day dedicating their professional lives to researching and analyzing current and potential holdings for the Mutual Fund. When you join a Mutual Fund, it is like having free access to the services of a fund manager who can take good care of your money.


3. Mutual Funds Come in Many Varieties

Mutual Fund comes in many types or varieties. There are Stock Funds, Bond Funds, Money Market Mutual Funds and Balanced Funds. Each would have its own objectives or strategies that can match a person’s risk appetite, goals and time horizon. Mutual Funds allow you to indirectly invest in the market. The availability of different types of Mutual Funds allow a person to build a diversified portfolio at usually lower costs and convenience.


4. Mutual Funds Have Low Minimum Investment Requirement

Many Mutual Fund companies allow investors to get started for as little as Php 5,000 and minimum additional placements of Php1,000.00.


5. Mutual Fund Investments and Redemptions

It is simple to open an account in a Mutual Fund. A person will only need to submit the account opening documents and other requirements (ie: Ids, check etc.) For additional investments, a person may do so regularly at any banking day. Some distribution firms like Rampver Financials, allow investors to enrol in their Hassle-Free Investment Programs (HIP) wherein clients may submit post-dated checks, so they can invest regularly every month or quarter.

On the other hand, since Mutual Funds are very liquid, shares may be redeemed any banking day. Usually takes 3-7 working days to process redemptions. Clients may opt to receive the proceeds via direct deposit to their bank account of choice or through check payments.


6. Mutual Funds Offer Transparency

Mutual Fund holdings are publicly available, which ensures that investors may anytime check on the fund management activities of the Mutual Fund. This also shows how the Fund is performing.


7. Mutual Funds Are Liquid

Unlike investing directly in the stock or bond market, open-end Mutual Funds are ready to buy-back its shares any banking day. This therefore allows its investors to make redemptions in Mutual Funds without having to worry about looking for a buyer.


8. Mutual Funds Have Strong Track Records

Through the years, Mutual Fund companies have proven to provide strong track records. Their performances are being audited and validated by independent agencies or auditing firms to ensure that reports are clear and accurate.


9. Mutual Funds Offer Safety and Security

Mutual Fund companies (in the Philippines) are registered in the Securities and Exchange Commission (SEC), most of them are also members of the Philippine Fund Managers Association (PIFA). These entities ensure that Mutual Fund companies are well-regulated and operate within specific rules, code of ethics and guidelines for the safety and protection of the investing public.


10. Mutual Fund Gains are Tax-Exempt

Gains realized by investors upon the sale of their Mutual Fund holdings are exempted from the 20% withholding tax – as provided under Republic Act R.A. # 8424 or the Tax Reform Act of 1997.