What is a Mutual Fund?

In the United States and Canada almost 70% of the people invest in mutual funds. In the Philippines, less than 1% are invested in mutual funds.

There will be many posts in this blog about mutual funds because it is a legal investment scheme that even a student can afford. A starting investment amount of P5,000.00 and you can add P500.00 to it any time

According to the US Securities and Exchange Commission a Mutual Fund is a company that pools money from investors and invests the money in stocks, bonds, short-term money-market instruments, or other securities.

Bond Funds invest in government funds to make the safest profitable medium-term investment for the company and its investors; while Equity Funds invest in stocks with the purpose of making the most profit for the company and its investors.

Things I like about Mutual Funds:
1. Investors are shareholders – thus are co-owners of the fund
2. Fund managers are also investors – it ensures they work for the shareholders to profit
3. What the fund earns is what shareholders also earn
4. Investors are charged a minimum amount upon entry (0.5% to 5% of investment). No charges when exiting the fund.

How to make it work?
First of all, the money invested in the mutual fund must have a purpose:
- college tuition for your new born child
- your retirement fund thirty five years from now
- your second home twenty years from now
- your health fund thirty years from now
- your travel fund fifteen years from now
- your silver wedding anniversary fund twenty five years from now

Second: understand it's a long term investment, as emphasized by the examples above.
- once you put money in, you only add to it
- never take money out from it
- emergency money belongs in the bank not it mutual funds

Third: you draw money from it only when the time for your specified purpose for it arrives.
- JR needs P100,000.00 for his first semester in college, redeem P100,000.00 worth of shares
- You spend P50,000.00 per month after you retire, ask the mutual fund to deposit in your bank account P50,000.00 worth of shares every month.
- Your silver anniversary is due next month. Close the fund you opened for your silver wedding anniversary.

Fourth: understand the timing of your needs, it is best to have one fund per need
- JR starts college fifteen years from now, invest in a fund that will finance it
- Retiring in thirty years, open a separate fund for it

For more information on Mutual Funds visit the Investment Company Association of the Philippines (ICAP). Here you will find all the mutual fund companies in the Philippines and all the types of mutual funds that are available for you.

Understand that each company and each fund has its own philosophy in investing. Some companies are more aggressive than others, while some are more conservative than others; which is why they have varying returns.

No company or fund is better than the other. Check each funds' track record, then choose which fund is suitable for your specific need.