HOW MUTUAL FUNDS – SEEK TO UNDERSTAND BEFORE YOUR INVEST…

Critical Points

  • When you buy into mutual funds, your investments are handled by a fund manager assigned by the company.
  • The returns on your investment are dependent on many factors, including your risk appetite and the fees charged to the investor and the fund.
  • The list of funds authorised or recognised by SEC for sale to retail investors is available on their website.

There are four  four basic types of mutual funds in the market:

  • Money Market Funds invest in short-term debt instruments like time deposits. (e.g. Sun Life Prosperity Money Market Fund)
  • Bond Funds invest in long-term debt instruments of governments or corporations.(e.g. Sun Life Prosperity GS Fund and Sun Life Prosperity Bond Fund)
  • Balanced Funds invest both in shares of stock and debt instruments.(e.g. Sun Life Prosperity Balanced Fund)
  • Stock Funds / Equity Funds invest primarily in shares of stock.(e.g. Sun Life Prosperity Philippine Equity Fund and Sun Life Prosperity Philippine Stock Index Fund)

WHAT IS MUTUAL FUND?

If you invest in a mutual fund your money is pooled with money from other investors and invested in a portfolio of assets according to the fund’s stated investment objective and investment approach.

A mutual fund is a fund which adopts a trust structure; not all funds use a trust structure. In this guide, the term “fund” will also refer to a mutual fund.

MUTUAL FUNDS vs. VUL

VUL insurance policies are another way to invest in funds. The difference between these and mutual is that VUL combine life insurance coverage and investment components. Your premiums are used to pay for units in sub-funds of your choice, and some of the units are then sold to pay for insurance and other charges. (make sure you understand the mortality expenses – it varies company to company).

If your main goal is investment, you may wish to consider mutual funds.

LET’S TALK ABOUT THE MECHANICS

In Philippine, local and foreign funds offered to retail investors are regulated as mutual funds. A fund manager manages the mutual funds. They are paid a management fee from the fund, typically based on a percentage of the assets they manage.

INVESTMENT RETURNS

You invest in a fund by buying units in the fund. There is a capital gain when the price of the units rises above the price you paid for the fund. Some funds pay dividends.

The price of each unit is based on the fund’s net asset value (NAV) divided by the number of units outstanding. The NAV of a fund is the market value of the fund’s net assets (investments, cash and other assets minus expenses, payables and other liabilities.) The NAV is usually computed daily to reflect changes in the prices of the investments held by the fund.

WHAT ABOUT MY LOSES?

Funds are not principal or capital-guaranteed. You may lose a substantial amount of the money you invested in certain situations. The risks of investing in the fund are described in the product summaries such as the prospectus and the product highlights sheet.

IMPORTANT TO NOTE: Fees can also reduce your returns. Fees are usually payable regardless of how well or poorly the fund performs. Even if your fund’s value has been fairly stable, the fees you pay will, over time, reduce the value of your investment.

WHAT ARE THE RISK?

Some of the risks associated with investing in MUTUAL FUND include the following:

  1. Market risk – The fund’s NAV or trading prices will be affected by changes in the value of the assets in the fund that in turn are affected by changing economic, political or market conditions.
  2. Liquidity risk – There is no secondary market for funds that are not listed. Hence, you can only redeem your units on the fund’s dealing days. The secondary market may also be illiquid for funds that are listed and traded on a securities exchange. This may affect the prices at which you buy or sell.
  3. Interest rate risk – Funds that invest in bonds, debentures or other debt securities will be exposed to interest rate movements because the prices of debt securities tend to move in an opposite direction to interest rates. For instance, debt securities prices generally fall when interest rates rise.
  4. Counterparts risk – Funds may be exposed to the risk that the counterparty that they trade with is unable to meet its payment obligations due to a deterioration of the counterparty’s financial situation or otherwise.

So what do you think? Are you ready? – Talk to a Qualified Financial Adviser and get familiar with the kind of funds they sell…Enjoy Investing.

Article by: Ashok MBA – Strategic Coach & Mentor for MDRT/COT/TOT

 

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