Let’s admit it, for beginners, investing in stocks can be a bit overwhelming and intimidating. Hence, people tend to shy away from stocks.
One of the most popular investment options for beginners is mutual funds. So for today’s post, we’ll provide a beginner’s guide to mutual funds.
What are Mutual Funds?
This is a type of investment that pools money from multiple investors to buy a collection of stocks, bonds, or other securities. This is somewhat similar to ETFs wherein instead of you buying stocks (or other investment types) directly, you’ll be putting your money on a “fund” that will invest in those.
Each mutual fund is managed by a professional fund manager. He is responsible for making investment decisions on behalf of the investors. Mutual funds are regulated by the Securities and Exchange Commission (SEC) and are typically offered by investment firms or brokerage firms.
Known investment/brokerage firms in the Philippines
- BPI Asset Management and Trust Corporation
- ATRAM Trust Corporation
- First Metro Asset Management, Inc, etc.
- Sun Life Asset Management Company, Inc
- Philam Asset Management, Inc
How do Mutual Funds Work?
When you invest in a mutual fund, you are buying a share of the fund. The value of the share is determined by the net asset value (NAV) of the fund, which is calculated by dividing the total value of the assets in the fund by the number of shares outstanding. The NAV of the fund changes daily since the value of the underlying assets (stocks, bonds, or investments that the fund buys into) can change.
Types of Mutual Funds
There are many different types of mutual funds, each with its own investment strategy and objectives. Here are a few examples:
Equity Funds
These mutual funds invest in stocks and are designed to provide long-term capital appreciation. Equity funds can be further categorized based on market capitalization (large-cap, mid-cap, small-cap), sector (technology, healthcare, energy), or investment style (value, growth).
Here are examples of Equity funds:
Philippine Equity Index Fund
- managed by the BDO Trust and Investments Group
- aims to replicate the performance of the Philippine Stock Exchange Index (PSEi) by investing in the same stocks that comprise the index
PAMI Equity Index Fund
- managed by Philam Asset Management, Inc. (PAMI)
- aims to track the performance of the PSEi by investing in the same stocks that comprise the index
Fixed-Income Funds
These mutual funds invest in bonds and other fixed-income securities. Fixed-income funds are designed to provide regular income to investors.
Here are examples of Fixed-income funds:
ALFM Peso Bond Fund
- managed by BPI Investment Management Inc.
- invests in a portfolio of fixed-income securities, such as government and corporate bonds, to provide investors with regular income
ATRAM Total Return Bond Fund
- managed by ATRAM Trust Corporation
- aims to provide capital appreciation and regular income by investing in a diversified portfolio of fixed-income securities, including government and corporate bonds
Balanced Funds
These mutual funds invest in a combination of stocks and bonds. Balanced funds are designed to provide both capital appreciation and regular income.
Here are examples of Balanced funds:
Sun Life Prosperity Balanced Fund
- managed by Sun Life Asset Management Company, Inc
- aims to provide investors with a balance of long-term capital growth and regular income by investing in a combination of Philippine equities and fixed-income securities.
BDO Balanced Fund
- managed by the BDO Trust and Investments Group
- aims to provide investors with long-term capital growth and income by investing in a combination of Philippine equities and fixed-income securities.
Index Funds
These mutual funds track the performance of a specific stock market index (e.g. S&P 500) and are designed to replicate the performance of the index.
Here are examples of Index Funds:
BPI Philippine Equity Index Fund
- managed by BPI Investment Management Inc
- aims to track the performance of the Philippine Stock Exchange index by investing in a portfolio of stocks included in the index.
First Metro Save and Learn Philippine Index Fund
- managed by First Metro Asset Management Inc
- aims to track the performance of the Philippine Stock Exchange index by investing in a portfolio of stocks included in the index.
Benefits of Investing in Mutual Funds
Professional Management
Mutual funds are managed by experienced fund managers who have the expertise to make investment decisions on behalf of investors.
Diversification
Instead of investing in individual stocks or bonds, mutual funds provide a way to invest in a broad range of securities. This diversification helps to spread risk and can potentially reduce the impact of market volatility.
Liquidity
Investors can easily buy or sell their shares at any time.
Low Minimum Investment
Since they typically have a low minimum investment requirement, this makes mutual funds accessible to investors with limited funds.
Blogger’s note
For beginners, mutual funds are a good option since you don’t need to worry about diversification and research which stocks/securities to buy. That said, I would suggest looking into ETFs instead. To be fair, I am currently investing in a mutual fund which is ALFM. This is the only mutual fund I’m buying and what I’m after is the steady dividend income that the fund provides.