Mutual Funds are pooled funds that are collected from many different investors and then invested in a host of financial instruments (i.e. stocks, bonds, treasury bills) on their behalf, depending on the stated objective of the mutual fund.
Mutual fund companies typically invest people's money in any of the following baskets:
Many citizens of advanced, wealthy and financially-mature countries such as the United States, Canada and Australia invest significant portions of their money in Mutual Funds and other similar pooled fund instruments.
Watch Matteo Guidicelli explain what Mutual Funds are
and how you can benefit by placing your money in it.
Why invest in Mutual Funds?
(1.) Mutual Funds typically offer returns that are superior to those earned in bank savings products over the long-run. Though returns are not guaranteed, records have shown that mutual fund returns outperformed those realized in savings and time deposit accounts placed in banks.
(2.) Mutual Funds enable the investor to gain instant access to a wide and diverse variety of financial instruments such as stocks and bonds, using relatively low amounts of capital. So if he decides to invest in an Equity Mutual Fund that places its money in stocks of SM, Ayala Land, Jollibee, Meralco and Globe Telecom, he gains access to stocks of all those companies and he doesn't need to directly go to the stock market to buy those stocks through brokers.
(3.) Mutual Funds match investors' risk profiles with the financial instruments invested in.
(4.) Mutual Funds can easily be redeemed and converted into cash, subject to applicable fees.
(5.) Mutual Funds let investors gain access to the skills and services of professional fund managers. These fund managers are tasked with finding ways to optimize the returns of the clients who have contributed their money to the mutual fund.
(6.) Mutual Funds require relatively small initial and subsequent investments.
How do investors earn in Mutual Funds?
A mutual fund investor earns when he redeems the shares he acquired when he invested his money in the mutual fund. These mutual fund shares are priced in terms of Net Asset Value Per Share or NAVPS.
The investor realizes gains when the NAVPS of his mutual fund shares at redemption exceed the NAVPS when he acquired those shares. Conversely, the investor realizes losses when the NAVPS at redemption is less than NAVPS at acquisition.
Rene decides to invest Php10,000 into an Equity Mutual Fund on June 1, 2015. He chooses the Back-End Load option. The Equity Mutual Fund has a NAVPS of Php1.25 on June 1, 2015. So we have:
After 10 years, Rene needs the money to make a laptop purchase. On June 1, 2025, he sees that the Equity Mutual Fund has a NAVPS of Php3.60. He then redeems the 8,000 shares he holds in the Mutual Fund.
This means that after 10 years, Rene's Php10,000 has grown to Php28,000. He has thus realized a 188% rate of return in a span of 10 years through investing in a Mutual Fund.
Gains and losses are called "paper gains/losses" when the mutual fund investor simply holds on to his mutual fund shares. However, these become real gains/losses when he redeems his shares and converts them into cash.
Investing in mutual funds is a way of compounding the value of your money. It potentially offers a vastly higher rate of return than if your money is simply stored through a savings account.
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