What is a Mutual Fund?

mutual fundIn recent years, Filipinos have become more daring in creating their investment portfolios. One factor that might have brought this behavior is due to the increasing availability of information through the internet. Before, most of us were already contented with the small but guaranteed returns from special deposit accounts and time deposits in banks. But as interest rates get smaller and smaller over the years, Filipinos become more open to other investment instruments.

One of these investment instruments is the Mutual Fund.

 

What is a Mutual Fund?

A mutual fund is an investment company that pools together the funds from different investors (individuals or institutions) to create a big asset base which is then invested in various securities, depending on the investment objective of the fund. A professional fund manager oversees the fund.  The mutual fund company then sells or issues shares to the public. The number of shares held by the investor represent their stake in the fund. Basically, each investor becomes a shareholder of the mutual fund and can partake on the income of the company.

 

Where is Mutual Fund invested?

In the Philippines, there are four basic types of mutual funds. These are categorized based on the investment objective of the fund.

  1. Equity / Stock funds – these are shares invested primarily in the shares of stock issued by Philippine corporations. This is the most aggressive investment among the four categories. Being aggressive, it provides high potential for returns, but at the same time also present high risk or probability of loss in the short term. Investment objective for this type of fund is capital appreciation.
  2. Bond funds – are invested in bonds such as treasury notes issued by the Philippine government and/or long-term debt instruments of corporations. This is type of fund is conservative; it presents low risk with low potential return. Investment objective for this fund is capital preservation.
  3. Balanced/Managed funds – are invested both in bonds and equity. Balanced fund provides opportunity for capital appreciation, with possible risks moderated by the presence of fixed-income securities.
  4. Money Market Funds – are invested purely in short-term debt-instruments (one year or less). Among all four, this fund provides the lowest income potential.

Some mutual fund managers create specialized funds which could be a mix of different allocations in equity-bond-balanced.

 

What is NAVPS?

Net asset value per share or NAVPS represents the price of one share or unit from a mutual fund. All shares in the mutual fund are bought and sold using the NAVPS. Prices change every business day depending on the performance of the fund in the market, on any given day. Some mutual fund companies adopt single pricing (one price for selling and redemption) while some use dual-pricing (Offer Price for buying and Bid Price during redemption).

 

How do investors earn in Mutual Funds?

NAVPS changes every day. Prices will either increase or decrease depending on market performance. Investors earn in mutual fund when share prices or NAVPS increase or appreciate. When NAVPS increased more than the price it was bought, the investor may sell back to the mutual fund company the number of shares held to monetize the gains. On the other hand, investor may realize a loss if shares are redeemed during price depreciation. During market slump or price depreciation, investors are usually advised not to redeem shares but instead, to make additional buying of shares to take advantage of the opportunity to buy shares at lower price.

Mutual fund investments present risks because of fluctuating prices. Thus, this type of investment is best held long-term.

 

Mutual Fund companies in the Philippines

In the Philippines, mutual fund companies are regulated by the Securities and Exchange Commission (SEC). At present, there are over 40 mutual funds companies in the country. Here’s a list of Mutual Fund companies offering Equity Funds. Other mutual Funds offering Balanced and bond funds will be featured in future posts.

Peso-Denominated Equity Funds

 

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