The Upside of Investing in Mutual Funds

July 24, 2017

by Erwin Baluyot

For the past twenty years, mutual funds have slowly become one of the most popular investment vehicles in the Philippines.

It has helped many Filipinos achieve their life goals and ultimately, attain their investment objectives.

But what is in these mutual funds that make it a popular choice in the investing public?

 

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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 fund managers.

Such focus is to analyse the investment products available in the market and actively select those that would give the best possible returns to the fund and its shareholders.

Fund managers call the shots. Their job is to seize market opportunities while lowering the risk for investors. They grow and maximize the earnings potential of the funds through strategic trading, optimized asset allocation, interest earnings and dividend yields.

This can be a relief to investors that simply don’t have the time to track and manage an investment portfolio.

 

Low Capital Requirement

Mutual funds accommodate investors who do not have a sizeable amount of money to invest.

Most, if not all asset management companies setting relatively initial purchase, subsequent monthly purchases, and both.

Direct investments usually require substantial capital. The minimum investment amounts for Treasury Bills and commercial papers, for instance, range from Php 100, 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 Php 1,000.00 to Php 5,000.00, he may not easily find a stockbroker who are willing service his account because most they prefer to dealing with high net worth individuals (rich people in layman’s terms) or at least with people who have substantially more than just Php 5,000.00 to invest.

In contrast, most mutual funds in the Philippines require a minimum initial investment amount of only Php 5,000.00 and minimum additional investments of Php 1,000.00.

Additionally, employees and participants of businesses, associations, and cooperatives can also invest in mutual funds, with amounts for as low as Php 250.00

 

Great Equalizer

Managed funds are the “great equalizer” in investments. The rate of return of those investing Php 5,000 is the same for those investing millions of pesos.

The returns are proportionate because each share in a mutual fund represents a unit of ownership, and each share in the fund earns the same amount.

If the fund, for example, earns 15% yield in one year, the investor who placed Php 1 million in the fund will be getting a 15%  return on investment; likewise, investors who placed Php 10,000 will get a 15% return, too. *

*(Assuming both investors placed their money at the start of the year.)

 

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.

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.

This 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.

Mutual funds provide access to a diversified portfolio, without the difficulties of having to monitor dozens of assets daily.

 

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Liquidity

Liquidity is the ability to readily convert investments into cash.

Mutual funds will usually create new shares to be sold to new investors; there is no finite amount as with stocks.

Since you buy shares directly from the mutual fund, they are redeemable and can be sold back to the fund readily.

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 highly reputable commercial banks for safe keeping not to mention, mutual funds are very transparent. Investors have not only the right to vote during shareholders’ meetings but are also allowed to know where the funds are invested.

 

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 stock brokerage 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 “muscle” of a big pool of funds, 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 stated in R.A. # 8424, otherwise known as the Tax Reform Act of 1997.

This benefit alone makes it more profitable investing in a mutual fund.

 

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Seek Financial Advice First

Although a mutual fund has a good number of advantages, it is still prudent and wise to seek the help of a reputable financial advisor.

These kinds of investment vehicles, much like any product would also have its own set of disadvantages, ie: fees, long term nature, etc .the which can also hamper the investor’s objectives and earnings potential.

 


This article also appeared on the Rampver Financials’ official Medium Publication, Rampver Reads.