How to Invest in Mutual Funds

Have you heard about mutual funds? If you’re a regular reader of personal finance columns and books, like me, then you’ve probably heard of it.

What Is It?

A mutual fund is a type of investment vehicle. It’s a managed portfolio of different stocks, bonds, and other investments. We can compare a mutual fund to a basket of investment assets. Whatever these investment assets depend on the professional investment managers of the mutual funds. Hence, the investors of mutual funds are co-owners of the entire basket or mutual funds rather than each of the individual stocks in the basket of investments or even stocks of the mutual fund company itself.

Why Mutual Funds?

If we have savings and we want to have higher returns on our investment, but we simply don’t have time to study stock investment and the stock market, a mutual fund is an alternative investment.

There are professional investment managers whose expertise includes stock picking and choosing other investments that are appropriate for the mutual funds’ portfolios. These investment managers are educated in investment and managing investment portfolios. Though I am not saying that investment education itself determines how successful professional investment managers are, at least these managers devote their time to managing the portfolio.

Moreover, for a minimal amount, a small investor can invest in mutual funds. Some mutual funds accept as low as PHP 1,000 as an initial investment. 

Given that mutual funds accumulate small investments from many investors, it ends up with a huge amount of investible funds. In the Philippines, last year, ALFM Peso Bond Fund is one of the largest. It has about PhP 60 billion in assets under management. ALFM Peso Bond Fund is one of the mutual funds that BPI Investment Management handles. 

Given the size of the asset under management of a mutual fund helps in managing the fund’s entire investment risk through diversification. We can compare diversification to the saying, “Don’t put all your eggs in one basket.” When the basket falls, all the eggs may break, and like Humpty Dumpty, it’s difficult to put them back together. However, if you have two baskets, even if one falls, the eggs in the other basket will still be safe. Simple, but this is still diversification.

If we’re talking about billions of pesos, then it’s much easier to buy many baskets. Because when you’re alone, your investable funds are much smaller, right? There is power in the masses.

What We Need to Learn

So we can decide whether mutual funds are an appropriate vehicle for us to put our money into, we need to know the following terminologies.

NAVPU

NAVPU or net asset value per unit. If we’re talking about stocks, this will be the stock price, but since we’re talking about mutual funds, the investors own a ‘unit’. NAVPU is calculated from the value of the fund’s entire assets divided by the number of units it has issued.

NAVPU = Total Fund Value / Total Number of Units

This is the value – buy or sell – of the mutual funds. So if you’re interested in investing in mutual funds, use NAVPU in computing how many units your investable funds can buy.

Front-end Load

Since mutual funds are professionally managed, there are fees that the investment managers are entitled to. If a fund is labeled a front-end load, then these fees are deducted from the investor’s monies before the number of units s/he bought can be computed.

Back-end Load

In this type of mutual fund, the investment fee is collected the moment the investor sells his units.

Prescribed Holding Period

The moment you invest in a mutual fund, you can immediately sell it if you wish. But when you sell your units before the prescribed holding period ends, you need to pay an early redemption fee. The prescribed holding period differs from one fund to another. Some of the funds which can be bought through COL Financials’ platform have no prescribed holding period like ATRKE Alpha Opportunity Fund and ATRKE Equity Opportunity Fund while Philam Fund has a 180-day prescribed holding period. 

Early Redemption Fee

This is the fee you pay when you sell earlier than the prescribed investment period. It can be as high as 1% of your total investment.

Balanced Fund

This is a type of mutual fund where the investment manager invests in stocks, bonds, and cash.

Maybe I have more than fifteen years of experience in stock investment. When I discovered mutual funds as an alternative investment vehicle, I compared these two asset types.

Stocks vs. Mutual Funds

Looking at the performance of my stocks and mutual funds investment, it is clear that my mutual funds have better returns. This better return becomes even more prominent if I compare the mutual funds with the stocks I recently bought.

The stocks I bought at the same time as the mutual funds have negative returns. This means that if I sell them now, I will have to realize losses. I’ll get less than the amount I put in. Well, I am not selling anytime in the near future, since I am investing for my retirement which I plan to be in 20 years or more. Nevertheless, looking at the redness of my portfolio makes even the calmest investor nervous.

In the COL Financials platform, like in any other investment platform, if an investment line has a market value lower than its average cost, it’s red while investments with a higher market value than average cost are green. Half of my investments are in red.

Many investment experts advise that if an investor has no time for stock picking, mutual funds are the right vehicle. Even I, who have time and skills in stock investment, don’t pick winning stocks 100 percent of the time.

On the other hand, I decided to invest in both — stocks and mutual funds. I want to directly invest in Philippine companies I am proud of like Jollibee, Meralco, and Bank of the Philippine Islands for example. After all, when our economy improves, the prospects of these companies will surely improve, giving additional wealth to their stockholders.

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Liza Gaspar was educated at the University of the Philippines, Diliman, and De La Salle University. She is a published author of children’s stories. She currently works for the Municipal Government of Piddig, Ilocos Norte. Email her at [email protected] or follow her antics at www.facebook.com/annalizamgaspar.

Note: This article was previously published in the printed issue of The Corporate, Guide and Style for Professionals Magazine