What is a Mutual Fund?

What is a mutual fund?

A mutual fund is an investment vehicle that pools together the funds of various investors---both individuals and corporations. The pool of funds is managed by a professional fund manager who uses the funds to create a diversified investment portfolio consisting of various investment instruments such as stocks and bonds.

What are the benefits of investing in a mutual fund?

For an affordable initial investment amount, you gain access to various potentially higher yielding investments normally available to investors with much larger funds to invest.  A mutual fund makes this possible because it pools together the funds of hundreds or even thousands of small investors.  The pool of funds is therefore large enough to access these potentially higher yielding investments.

Mutual fund investors also benefit from the investment management expertise and market knowledge of the team of professional fund managers that manages the pool of funds.  These fund managers ensure that the funds are optimally invested and diversified at all times. Therefore, you don’t need to watch the markets yourself since there is a team that is already doing it for you.

How much will I earn if I invest?

Mutual funds are not time deposits and therefore do not pay out a fixed rate of return. Mutual funds invest in stocks listed on the stock exchange as well as bonds issued by the government and corporations. As a result, the value of your investment fluctuates daily depending on the performance of the underlying investments.  Because of this, your return cannot be guaranteed. Your actual rate of return depends on many factors such as the performance of the underlying investments as well as general market and economic conditions.  However, over the long-term, investments in mutual funds outperform traditional time deposit placements.

Is my principal secure? Can I lose money? What are the risks of investing?

As with all other investment instruments, investing in mutual funds involves a certain amount of risk. Stock and bond prices go up and down daily.  So as the value of the underlying instruments in which the pool of funds was invested fluctuates, so does the value of your mutual fund investments.  Depending on market conditions, there may be periods in which you may lose money.  However, until you actually liquidate or withdraw your investment from the fund, these will simply remain “paper losses” which can be recovered when market conditions stabilize.

Moreover, the fund managers of the fund also do several things to control and minimize risk. First, they analyze all investments thoroughly before including any stock or bond in the portfolio.  Second, they ensure that the fund is properly diversified, i.e., invested in many different stocks or bonds.  As such, a drop in the price of one investment may be off-set by gains in another. Third, the fund managers are subject to regulatory and internal investment restrictions that prevent the fund from being invested from certain speculative investments and encourage proper diversification.

While there are risks in mutual fund investing, the returns can also be rewarding in the long-run. There is always a risk-return trade-off in any investment.  What is important is to know how much risk you are willing and able to take and select an investment whose risk profile matches yours.

What is diversification? Why is it important?

Diversification simply means “not putting all your eggs in one basket”.  This is especially important in investing.  In a well-diversified portfolio, losses from some investments can be off-set by gains in other investments.  This reduces the overall fluctuations or volatility of the value of the portfolio. By investing in a mutual fund, you gain instant access to a diversified portfolio of investments. It is, however, also important to realize that not all risk can be diversified away. There are certain economic, market and political factors which may affect all investments adversely.

How do I invest in a mutual fund?

You can participate by buying shares of the mutual fund.  The price of these shares, also known as the Net Asset Value Per Share or NAVPS, changes daily depending on the performance of the underlying investment portfolio.   As the NAVPS increases, the value of your investment also increases.  The mechanics of investing in a mutual fund are very similar to buying shares in the stock market.

What is the net asset value per share, or NAVPS?

The net asset value per share (NAVPS) is the value of each share of a mutual fund. A fund's NAVPS is calculated daily and is the price used when purchasing or selling mutual fund shares. To determine the value of your shares, simply multiply the number of shares you own by the NAVPS.

How do I withdraw my money from the mutual fund?

You simply need to sell your shares in the mutual fund.  The price at which you sell these shares is the NAVPS for the day.  You will get the proceeds of your withdrawal within seven (7) banking days.

What happens to my investment if something happens to me?

Your shares in the mutual fund will form a part of your estate and will be distributed to your heirs (usually surviving spouse and children) accordingly. Rest assured, your investment will not disappear, or be "taken back". To ease the transfer of the fund shares you may want to consider opening a joint account or trust account.

Is my investment covered by the PDIC (Insurance covering bank accounts in the Philippines)?

No. A mutual fund is not a deposit product and is, therefore, not covered by the PDIC.  However, when you invest in a mutual fund, you are considered a shareholder and in effect are entitled to your proportional share in the total assets of the fund.  The PDIC, on the other hand, only insures up to P250,000 of your total deposits with a bank and not your entire investment amount.