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| Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (Photo credit: Wikipedia) |
Introduction to Mutual Funds. Read on... :)
On May 15 the Philippine Stock Exchange index (PSEi) reached a new all-time high, ending that day with 7,397.34 points, representing a year-to-date investment return of more than 25 percent. This is the 31st record high the Philippine stock market has reached this year.
During this and past year’s bull run, were you invested?
Investing in the stock market requires some specialized knowledge. As such, some people avoid the stock market entirely. For other people, they try to get in to enjoy the profit, but at the expense of speculating how the stock market will move.
Good news to everyone who wants to participate and enjoy the gains of the stock market without having the time to study all its intricacies. There is an investment option called mutual fund(s) that can help you get good returns without having to learn everything and continually monitor the stock market. Essentially, the investor will just select the preferred mutual fund(s), hand the money to the mutual-fund company to subscribe shares and immediately get to enjoy the ups and downs of the fund.
So what is a mutual fund? It is an investment vehicle that pools the money of various individual investors to buy corporate bonds, government treasuries, stocks and other financial instruments. It is important to note that investment returns are not guaranteed and are subject to market volatility, unlike savings or time deposits where interest rates are fixed but investment returns are significantly lesser (and mostly, cannot even outperform inflation rates).
There are four types of mutual funds:
- money market fund
- bond fund
- stock/equity fund
- balanced fund
The return of investment of the money market fund is aligned with the returns of the money market, which is at 2 percent per annum. Whether you are a conservative or aggressive investor, it is best to avoid the money market fund as you can get a comparable rate of return with other financial instruments such as a special deposit account.
Now let us go to the bond fund. This type of mutual fund has majority of its investment in fixed-income instruments, such as corporate bonds and government treasures such as Treasury bills, notes and bonds. These instruments are called fixed income because they generate regular and predictable interest rates per annum. This fund is best suited for conservative investors who have a shorter investment time frame (typically three years or less) and returns are conservatively on an average of 6 percent to 8 percent annually.
Stock fund, commonly called equity fund, is mostly invested in stocks. The holdings of the various Philippine stock/equity mutual funds are mostly publicly listed companies on the PSE and could range from big, well-known companies to smaller ones. This type of fund is best suited for aggressive investors who have an investment time frame of seven or more years, as there is more volatility but returns are higher, conservatively on an average of 10 percent to 12 percent annually.
There is a special stock fund called an index fund. This is composed of stocks and weighted according to the composition of the country’s stock index. For the Philippine index fund, the composition is identical to the PSEi. Compared to typical stock funds, the index fund is passively managed, as the fund manager will only transact if there are changes in the index’s composition.
http://pinoyfiq.com/pinoyfiq/financial-education/introduction-to-mutual-funds-part-i-of-ii
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