Understanding Mutual Funds
Back in December 2008, I put my savings at LBC Bank because they had a pretty good interest rate for a Time Deposit Account. It was just for a month but it didn’t really matter. I wanted my money to be safe from my spending hands. The plan was for me to keep adding up funds to it on a monthly basis so that in a year’s time, I should have at least P60,000. That isn’t very big, mind you. But this is my first real step in saving and making sure that I would have some money in reserve.
Thankfully, I have a book by Beth Kobliner called “Get a Financial Life: Personal Finance In Your Twenties and Thirties
According to Kobliner:
A mutual fund is a type of investment that pools together the money of thousands of people. At the helm is a fund manager, the person (or company) in charge of investing the money. Depending on the type of fund, the fund manager will generally invest most of the fund’s money in stocks, bonds, or money market instruments; these are all known as securities.
Mutual funds are relatively safer to invest on for people who are just starting to figure out how to meaningfully manage their money. This is because mutual funds are diversified. Meaning to say, you money is not put on just one kind of investment. Your money is being put on various kinds of stocks, bonds and other money market instruments, thereby distributing the risk and protecting you from losing your money from sudden changes in the market. Secondly, the mutual fund is being managed professionally. If you tried to do it yourself the first time, you may find it difficult to know which securities to invest on.
Stock (also called equity funds) are shares of stock of publicly offered corporations listed in the Philippine Stock Exchange. This kind of fund has the highest risk. You win or lose big time! Among all the kinds of mutual fund, this has the highest potential for growth. Bond investments, on the other hand, are usually invested in treasury notes or bonds issued by the government. Bonds are usually guaranteed so the possibility of loss is low. You get to keep your capital while allowing it to grow slowly and surely.
If you’re like me, you’d want to be somewhere in the middle. So there are also balanced funds, consisting of a mixture of equity and bond funds. The growth of your investment tends to be higher with the stock/equity component but the risk is minimized by the bond component. The return-on-investment is also somewhere in the middle.
Lastly, money market funds are just like bonds. These are invested in fixed-income securities. It’s just that the growth of the fund is also not as great as that of equities. The only difference is that these money market funds are usually short term.
I still have much to learn about mutual funds. Thankfully, there are a number of available resources online. I also have a number of books on financial literacy. For a start, you can also check Fitz Villafuerte’s blog, which provides lots of useful information on mutual funds, business and personal finance.
Wow! Thanks for the mention. I really appreciate it.
Hey Fitz. No problem.
I just appreciate all the information I’m getting from your site. 