Mutual funds! How do you choose among the many options? Can you just pick them up from shelves in a store, read their labels, and put them in your basket of investments? Probably not. But in a way, you can.
I have compiled below what I have read so far about how to choose mutual funds. These come from different sources and I have weeded out what I think do not apply to to the Philippine market. Compared to learning the stock market behavior, this topic is relatively easier to absorb. So read on...
1. Read up. Keep learning. Read my blogs or any material that can carry past what you're learning here. Knowledge is power. And knowing is half the battle.
2. Settle on a suitable asset allocation. After you drew up your battle plan for investing (determined your risk tolerance, growth strategies, etc...), purchase your funds according to this strategy. It would come out pretty useless if you would just ignore this plan wouldn't it?
3. Discover the many research tools that are readily at hand. Ok we have books, magazines, newspapers, the internet. Everything is there. Look for fund performance, rankings, etc...
4. Check on no-load. These so-called loads, only mean commissions. There is one no load mutual fund I know in the Philippines and that is the Prosperity Money Market Fund. Performance-wise though, I see no growth there. 3.88% on the 3 Yr. Investment Return makes almost no difference to a time-deposit.
5. Look for funds with low annual expenses. You really have to check this out. This could be eating up your profits. Please make sure your fund performs well enough to cover the expenses and outperform the index fund over a long period of time.
6. Look for fund managers who have been in place for at least 5 years. Managed funds are run by people not computers, and you have to know who these people are. When the top stock picker leaves, so does the talent that goes with him/her. Or make sure the team left is well-trained by these investment wizards. Team-managed funds are normally managed by a real shot caller. This person must be identified at all costs. Hehe. Stick with funds whose lead managers are specifically identified.
7. Look for superior prior performance. Previous good records aren't predictive themselves. But this is an indication that the manager is good. Your quarry is always the manager not a particular fund.
8. Compare the fund with its peer group. The fund should outperform its peer group as well as a general market average.
9. Check for consistency of investment style. Style is defined by the kind of stocks or investments it invests in. You want them consistent. What they say in the prospectus should always be what they should do in the real world.
10. Consider the Fund's Size. It's size should be congruent with its investment goals. Managers sometimes announce that they're going to close their funds. That's no time to buy. It simply means the fund has attracted more new money than it can handle, which means performance might fall off.
11. Check the fund's performance in down markets. Some funds drop further than the general market average, then spring back - growth funds. Others go down less but may not turn up fast - value funds. Are you daring? Conservative? Choose the funds that makes you happier.
12. Check the minimum investment. Here in the Philippines. Some start at Php 500. Others at Php 10,000. Choose your pick. Be practical. What can you realistically afford? Additional investments you want to purchase can then vary per fund.
That wraps it up for now.
Showing posts with label Mutual Funds. Show all posts
Showing posts with label Mutual Funds. Show all posts
Tuesday, July 27, 2010
Seven Reasons to love Mutual Funds
Mutual funds are long-term investments. They are not individual stocks and you simply cannot simply treat them like that. According to Jane Quinn - Financial Planner and author, a stock fund will serve you better than any other financial investment for long-term growth.
I'm giving below a list of 7 Reasons to love mutual funds.
1. You get full-time money management from the person who runs the fund. You don't get that from stock brokers. Their job is to sell, not to take care of the overall shape of your portfolio.
2. You can pick the level of market risk you want to take.
3. In an index fund, your investments are guaranteed to do just about as well as the market. A promise no other investment can make.
4. You share in the fortunes of a large number of securities rather than owning just a few.
5. You can check a fund's past performance record.
6. You can participate in the stock market's long-term gains without having to think of which particular stock to buy or sell. You mutual fund manager does that for you.
7.You can automatically reinvest your dividends and capital gains. Steady compounding doubles and redoubles your returns.
I'm giving below a list of 7 Reasons to love mutual funds.
1. You get full-time money management from the person who runs the fund. You don't get that from stock brokers. Their job is to sell, not to take care of the overall shape of your portfolio.
2. You can pick the level of market risk you want to take.
3. In an index fund, your investments are guaranteed to do just about as well as the market. A promise no other investment can make.
4. You share in the fortunes of a large number of securities rather than owning just a few.
5. You can check a fund's past performance record.
6. You can participate in the stock market's long-term gains without having to think of which particular stock to buy or sell. You mutual fund manager does that for you.
7.You can automatically reinvest your dividends and capital gains. Steady compounding doubles and redoubles your returns.
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.
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.
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