The power of mutual funds lies in its ability to pool together funds from so many different investors. Imagine a thousand investors each with P5,000 to invest who decide to pool their funds together. That’s already a pool of P5 million! Now imagine that instead of just investing P5,000 each, some investors put in P10,000, P100,000 or even P1,000,000. The size of the collective pool would even be bigger. And when it comes to investing, there is strength in numbers. P5,000,000 can gain better access to more diversified investment instruments than P5,000.
A mutual fund is a vehicle that allows investors to combine their resources. Because of this, you don’t need a large amount of money to gain access to a well-diversified portfolio of top-performing investments. A mutual fund makes this possible. Here are some of the key benefits of investing in mutual funds.
A mutual fund is managed by an experienced, full-time fund manager who is focused solely on analyzing the financial markets and seizing market opportunities as they present themselves. By investing in a mutual fund, you benefit from the fund manager’s experience and market insight.
Potentially Higher Returns
By pooling together the funds of thousands of investors, a mutual fund is able to access potentially higher yielding investments that require large minimum investment amounts. Thus, investors are able to access potentially higher yields that may not normally be available to them due to the size of their individual funds. Moreover, the fund manager ensures that the mutual fund generates the best possible returns for the given level of risk of the mutual fund.
Should the risk pay off, the higher amount returned to you could be invested in any number of highly useful things; for example, if you happen to reside in Canada, some of it could be put into an RESP, a government program that assists with post-secondary costs.
Simply put, diversification means not putting all your eggs in one basket. This is especially important in investing. Through proper diversification, losses in one investment can be off-set by gains in another. In the process, overall risk is minimized. Investing in a mutual fund provides you with immediate access to a diversified portfolio of funds. By virtue of the size of the pool of funds, the mutual fund is able to purchase many different investment securities and diversify.
You may have your shares in a mutual fund redeemed at any time and just need to wait a maximum of seven (7) banking days to gain access to your funds.
Mutual fund operations are governed by the Investment Company Act whose implementing rules and regulations specify particular limits and constraints in the investment activities of all mutual funds. The Securities and Exchange Commission (SEC) sees to it that all mutual funds comply with these statutory regulations. Moreover, mutual fund companies are regularly audited by an independent auditor. The assets of the mutual fund are held by a third-party custodian bank.
DIFFERENT TYPES OF RISK
Depending on the kinds of securities it is allowed to invest in, a mutual fund is subject to one or more of the following types of risk.
The risk that the value of an investment will be adversely affected by the fluctuations in its market prices. These fluctuations may be the result of two other kinds of risk:
- Unsystematic Risk – the variability in the stock’s price due to factors associated with the company. This type of risk can be minimized through proper diversification.
- Systematic Risk – the variability in price related to factors that affect the economy and the financial markets as a whole.
The risk which affects stocks in a particular industry or sector sector. Market or economic factors affecting that industry sector, could have an effect on the value of a fund’s investments.
The risk that an investment may not find a ready buyer and, as such, may have to be disposed at a substantial loss. To reduce this risk, mutual funds try to stay away from securities which do not have a ready buyer, are not listed, are listed but are not actively traded and are very volatile.
Interest Rate Risk
The volatility of bond prices that results from changes in interest rates. Bond prices are inversely related to interest rates. When interest rates rise, bond prices fall and vice versa. Interest rates are affected by various factors such as the expected direction of inflation, monetary policy, political risk and other economic factors.
The creditworthiness of the bond issuer and its expected ability to pay interest and to repay its debt. A mutual fund can manage this risk by investing only in investment grade bonds.
Purchasing Power Risk
The risk that the rate of return on an investment will not be greater than the rate of inflation thus diminishing the value of your money, i.e., the value of your money in real terms will be less than the purchasing power of your original investment.
Also known as foreign exchange risk Ã¢â‚¬â€œ the risk that fluctuations in the exchange rates may negatively affect the value of the fund’s investment. This applies to mutual funds that are denominated in one currency but invest in instruments denominated in another.
A type of risk associated with all actively managed forms of investments. Investment decisions are made by portfolio managers who can and do make mistakes from time to time by selecting wrong issues or misallocating the assets of the fund. These errors in judgment can result in a fund’s underperformance, decline in value or even losses.
For more information, contact:
Philequity Management, Inc.
Suite 2004-A, East Tower, Philippines Stock Exchange Centre Exchange Road
Ortigas Center, Pasig City
Telephone No: 689-8080
Fax Number: 706-0795
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