Sunday, February 21, 2010

MONEYVANTAGE: Getting a Mutual Fund

In the past several weeks, I came across with some old friends and peers from high school and even college and got to talk to them about investments wherein many ask what investments can they delve into. A lot people I ask haven't heard about mutual funds nor heard or have little knowledge of this investment instruments. So I am willing to share some of my knowledge and background on this and made some Frequently Asked Questions or FAQs for beginners who do not know about these golden eggs and what it can do for them in the long run. As a disclaimer, past performance of the mutual funds may vary from time to time and may not result in the expected future yield.

What are Mutual Funds? How do this work? What are these financial instruments anyways?


Mutual Funds are a type of investments that are pooled together from group of investors and are professionally managed by a portfolio manager. The seasoned manager on the other hand invests the funds' assets in different variety of investments such as stocks, bond or other investment securities or a combination of both stocks, bonds and securities.

Net Assest Values per shares (NAVPUs) represent the value of total equity, or it may be divided by the number of shares outstanding and thereby represent the net asset per value of investment.

Concept of the mutual funds are seen in the diagram below.



Types of Mutual Funds


There are three types of mutual funds available in the market and are offered by mutual fund companies in the Philippines namely:

1.) Stock or Equity Mutual Funds - which consists mainly on stock investments and are invested in listed and non-listed equity securities in Philippines companies and some are also invested on invested in international companies;

2.) Balanced Mutual Funds - are a mixture of stocks, bonds and money market. These are generally hybrid funds which are composed mostly of the two (stocks and bonds) and are widely invested on both;

3.) Bond Mutual Funds - are mainly invested in debt securities or treasury bonds issued by the government of the Philippines and also corporate bonds issued by major Philippine companies.

Returns and Risks

There are no guarantees of risks and safety margin in this type of investments, however. I put some summarized information regarding the three types of mutual funds.

Choosing your Mutual Funds

There are several mutual fund products out in the market to select from. However as I have said in the disclaimer, the past performance of this type investment may vary and depend on the market conditions and are not indicative of expected future returns.

Expenses, Fees and other charges


Thing to bear in mind before venturing into mutual funds.

There are several fees to remember on getting the mutual funds wherein they are the loads, Redemption fees, Transaction fees and 12b-1 wherein this may vary with different mutual fund products available. Just to give you the basics of mutual fund fees and expenses:

1. Sales Loads - is the commission that you pay when you buy shares in a mutual fund. Also known as a front-end load, this fee typically goes to the brokers that sell the fund's shares. Front-end loads reduce the amount of your investment

2. Redemption fees - A fee that some fund companies charge their shareholders when they sell or redeem their shares. Unlike a deferred sales load, a Redemption fee is paid to the fund-not to the broker-to defray fund cost associated with redemption

3. Management Fees - Paid out of the fund assets, management fees include payments to the investment adviser for portfolio management, any other management fees payable to the fund's investment adviser or its affiliates, and administrative fees payable to the investment adviser that are not included in other categories.

4. 12-1B fees - Covers the expense of providing information to shareholders about their investment through phone, mail and especially the internet as a major channel distribution for shareholders.

5. Other fees - This includes all expenses not subsumed under another category, including c
custodial expenses, legal and accounting expenses, transfer agent expenses, and other administrative expenses.

What else to Remember?

Mutual Funds can be held by the professional managers and company for two years maximum, however early pull out of your investments will have tax and redemption fees charged to your mutual fund account if you wish not to pursue it after a few months as an example or before the given redemption date.

Before buying, shop around first and ask for prospectus. Learn the past performances and how well they are managed by their appointed professional fund managers by asking some questions with the selling agent and also checking around information on their websites. As I have said earlier in the disclaimer, Past performance is not indicative of future results or yield of the mutual fund.

Remember, every decision you make are very crucial. Planning, learning and preparing are the next necessary steps of your Financial Planning stage in becoming a Financially independent person.

Happy Investing!


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