I started saving money in a bank, just like you, because it’s a good place to keep it safe. But then I realized that there’s something wrong. Imagine for every hundred thousand that I have in my savings account it only earned Php 250. Oh, did I say that withholding tax will still be deducted from it? So I have decided to just complete my emergency fund and after that, I will invest the rest. If you are reading this then I guess we are on the same page.
READ: 5 Simple Steps in Achieving Financial Freedom
If you want to invest your money but don’t have time to study, monitor, and time the market then mutual fund and UITF are two of the best choices. At a glance, they might look like the same but actually, they’re not. This is a two-part post and is made to help you decide which one might be the best for you.
Table of Contents
What is a Mutual Fund?
A mutual fund is an investment vehicle made up of pooled money from investors like you which are managed by fund managers.
The pooled funds will be used to invest in different kinds of securities like stocks, money market, bonds, and other assets in the hope of making the fund grow.
It sounds very overwhelming, right?
Just imagine if you want to buy bonds it may cost you hundreds of thousands. But if you just started in investing that amount is simply enormous.
But if money from investors like you are gathered or pooled then your Php 5,000, for example, will be enough to invest in bonds.
In short, a mutual fund is a great vehicle for those people who may not have the funds and not yet knowledgeable in investing but wanted to enjoy its earning potential.
Advantages of a Mutual Fund
Being an investor you must know the benefits that you can enjoy from your investment. This will help you in striking a balance between the pros and cons of the investment. So here are the advantages of investing in a mutual fund.
Start Small
You can start a mutual fund with only Php 1,000. Previously, most companies offer this at Php 5,000 but now they lowered it to open an account. This is to encourage more people like you to get started in investing.
Safe and Transparent
Another advantage of investing in a mutual fund is being a very safe place because this is monitored by the Securities and Exchange Commission (SEC). You can be sure that this kind of investment is not a scam but a legit way to make the most out of your money. Plus, the fund is also transparent in a way that they always release fund fact sheet so you’ll know where your money is invested.
Diversified Portfolio
Diversification according to Investopedia is a risk management technique. The main goal of this is to achieve higher return and lower the risk than investing in any individual investment found within the fund.
I know it sounds very overwhelming again to new investors like you (and me also hehe). Think of this by not putting all your eggs in one basket because if you do and it slipped your hands then all your eggs will be broken. Something you don’t want to happen to your eggs, no pun intended, the more with your investments.
Long-Term Growth
A mutual fund has already a long history that you can use to track the performance of a specific fund you may want to invest in. You can use it as a reference to see how your investment can grow through time which can then add confidence to you as an investor.
Tax Exempt
One of the best advantages of investing in a mutual fund is that it enjoys a tax-exempt from capital gains tax. This means you’ll get to enjoy your earnings with no deductions at all.
Disadvantages of Mutual Fund
High Fund Management Fee
The biggest disadvantage of a mutual fund is that it has higher fund management fees compared to the closest thing you can get, UITF.
Sales Load
Aside from it, your investment will be subjected to front sales load or simply charging you every time you add to your investment. And end sales load every time you will withdraw against your fund.
However, you can get away from these charges if you’ll select to stay invested for at least 5 years. After all, this is a long term investment.
Final Thoughts
Basically, there are three reasons why a mutual fund may be the best investment for you. The first one is if you are new in investing and may not be ready to handle the investment on your own. The next one is that you don’t have time. Investing is about time and timing the market is not easy as it may seem. Even professionals in the field can still have problems with it. Lastly, you can start investing with low capital. I know how it may get too intimidating for beginners but always remember that the only way to get ahead it to get started.
Ton is an electronics engineer, financial blogger, insurance agent, and a certified investment solicitor. A multi-awarded financial advisor with clients ranging from lawyers, doctors, engineers, accountants, business owners, company directors, and OFWs to minimum wage earners had sought advice from him in achieving lifetime financial freedom.
One thought on “Basic Investment: Mutual Fund 101”
Very informative! I hope everyone who got to read this realizes that they should start investing today.