If you’re looking to invest in the Philippines’ stock market but don’t have time to learn about it, your best option is to invest in mutual funds.
What are mutual funds?
Mutual funds are professionally managed investment products. Think of it like a company that brings together a large group of people and invest their money on their behalf to a collection of assets such as bonds and stocks or a mixture of both.
Unlike stocks, you’d be buying here a basket of assets instead of just holding one.
Investing in mutual funds provide two key benefits – professional management and diversification.
- Professional management – This simply means that you won’t have to worry about picking stocks and managing your own investment. There’s a fund manager who will make those decisions and look after your portfolio.
- Diversification – Unlike stocks, your risk is spread out across different asset classes.
Other benefits include…
- Low initial investment – You can start investing with as little as P5,000.
- Liquidity – Like stocks, you can always redeem your shares.
Types of mutual funds
In the Philippines, there are five common types of mutual funds. Each fund has its own objective based on its asset allocation and investment strategies. So, it’s important to understand each type of fund as it involves different risk and reward profiles. Meaning, the higher the risk, the higher the potential return.
Here’s a quick overview…
- Money Market Funds – This fund invests in cash and cash equivalents. Considered to be risk-free and a safe place to park your money over a short period of time. You won’t get substantial returns, but you won’t have to worry about losing your capital. A typical return is a bit more than what you would earn in a regular checking or savings account.
- Bond Funds – This fund invests in bonds or fixed-income assets which aims to achieve stable returns over the short to medium term and mostly issued by reputable companies and the government.
- Balanced Funds – This fund invests in both shares of stocks and bonds. It aims to achieve a medium level of return over the medium to long term. A typical balanced fund will have a weighting of 50% equity and 50% income to provide a balanced mixture of safety, income, and capital appreciation.
- Equity Funds – This fund mainly invests in shares of stocks and aims to achieve higher returns over the long term.
- Index Funds – This is a passively managed fund that seek to replicate the performance of a broad market index such as the PSE Index.
Like buying stocks, there are fees associated to owning mutual funds. Some funds may have higher or lower fees depending on the funds’ classification. The three most important things to look out for are loads, redemption fees, and operating expenses.
- Loads – These are fees that can be charged either when you buy (front-end load) or sell (back-end load) a mutual fund.
- Redemption fees – These are fees that can be charged when you sell a fund prematurely – usually within the minimum holding period.
- Operating expenses – These are fees to maintain the business operating the fund. It includes management fees to pay for the fund manager’s expertise and other related operating costs.
The fund prospectus outlines everything you need to know about the fund – from its objectives, policies, restrictions, risk factors, investment procedures, redemption of shares, to fees associated with the fund.
So, make sure to read the funds’ prospectus before choosing a fund.
Choosing the right fund
Before investing in general, you need to have an investment goal. Having a goal will help you choose the right investment and the time required for you stay committed.
Apart from that, your risk appetite will play in important role in the selection process. Remember, each fund has its own risk and reward profiles. And the higher the risks, the higher the potential return.
For example, if you’re in your 30s and looking to invest for retirement, let’s say at 60. You know that stocks tend to perform better in the long term and that you have 30 years to invest to ride the ups and down of the market. So, you’d be wise to invest in equity funds instead of cash or bond funds to achieve capital growth over the long term.
Same is true for shorter term goals. If you’re just looking to park your money safely with stable returns, don’t go for equity funds. Stocks are high risk investment and volatile in the short term. If the market goes down and you need to redeem your shares, you’d be selling at a loss. So, try to aim for capital preservation with low risk investment profiles like cash or cash equivalents instead.
You can start by looking for reputable companies that offer such investment products, inquire with your local bank, or open a stock brokerage account. For convenience, I recommend opening an online trading account with COL Financial.
When you open a COL account, you also get access to mutual funds. Meaning, you can directly buy and sell shares online using COL’s trading platform which makes things a lot easier. Also, all mutual funds offered with COL have zero front-end fees.
To get started, visit www.colfinancial.com and click “Open an Account.”
Here’s a quick tutorial on How to Open a COL account.
Mutual funds provides an easier alternative to investing in the stock market as well as other types of asset classes. You can choose to invest in a basket of assets such as stocks, bonds, or a mixture of both.
Just choose from a wide variety of funds that suits your risk profile, investment goal, and time horizon and let these so-called experts “fund manager” do the investing for you.
To get started, simply open a COL account, fund it, and start investing.
In this article, you’ve learned how to invest in mutual funds. If you have some questions, feel free to drop me a comment below.
Thanks for reading!