What Is A Mutual Fund?

If you’re anything like me, you’ve already read the word, mutual funds, a thousand times already. It’s practically in every personal finance book. Almost all of them advice you to invest in mutual funds. Almost all of them advices you to buy into mutual funds. What exactly is a mutual fund?

A mutual fund is a collection of stocks, bonds and other investments. The collection itself comes from the amount invested by each member. The investment choices are then carefully picked by the fund manager. The revenue, minus the expenses are then reinvested into the mutual fund.

Understanding Mutual Funds
Most mutual funds member or investor receives shares, more commonly known as NAVPU in exchange of the money they invested. The NAV is the market value of one unit of a mutual fund on a given day which is computed based on the value of the mutual fund’s assets minus the expenses and liabilities divided by the number of members.

To redeem your money, you should sell back the shares to the mutual fund company. It should be noted that the money you invested might not be the same amount that you invested in the first place. It may have gone up in value or it may go down. It all depends on the NAV on the date you redeem.

Why invest in Mutual Funds?
Mutual Funds are not savings accounts.

Savings accounts saves your money from loss. This means that you should receive practically the same amount when you withdraw your money. In mutual funds, you may not receive the same amount.

Savings accounts are ensured by PDIC up to 500,000 PhP. Mutual Funds offer not guarantees that you would receive any amount on redemption.

While mutual funds are much riskier than savings accounts, they offer much more in return. Savings accounts interest rates are below 1% (.75%) per annum as I am writing this. So, when you save 1,000 PhP in a savings account for one year, you’d be getting 1,007.5 PhP. Seven pesos.

Mutual Funds returns are much much higher depending on the type of mutual fund you get. You could even get returns up to 50% and higher.

Another reason why someone should invest in mutual funds is that mutual funds are diversified. Meaning, the mutual fund buys many types of investments ranging from bonds to stocks. The diversification shelters you from various market hiccups.

Further Reading
While I have given you information on mutual funds, it’s still a great idea to read up on mutual fund investing through other resources like blogs, books and from a professional finance advisor.

I will probably be giving you more information about mutual fund investing in the next few weeks, so stay tuned.