Money Matters

Investing in mutual funds 101

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12:57 AM January 31st, 2013

By: Efren Ll. Cruz, January 31st, 2013 12:57 AM

Question: I have heard a lot about the benefits of investing in mutual funds. But I do not know where to begin. Can you give me advice on the process of choosing a mutual fund?—Sent through Ya!man mobile app’s “Ask an Expert”

Answer: Thank you for allowing me to share your question. To simplify matters, let’s break up my answers into two categories:

Know yourself

You probably would have gone to a clothes shop looking to buy the latest fashion in outfits. You may have heard about this latest fashion from your friends, social networking sites, or read about it in the newspaper or magazine. You may have tried on that outfit only to find out that it did not suit you. It simply is not you.

The same is true with buying mutual funds. It may be the latest craze but it is you who will determine if it or its variations will suit you.

What you are investing in and what risks you are willing to take determine who you are as an investor. If you are the type who is looking for above-average returns from long-term investments and/or is willing to accept sizable losses on your funds, you are the aggressive type of investor. Bond, balanced and equity invested mutual funds, especially those that are actively traded, will suit you well.

If you are looking for moderate and, more or less, steady returns on your money with minimal to moderate risk, you are the conservative type. You will be better off with the not so actively traded bond funds and perhaps money market funds.

Who you are as an investor can also be determined by your life event stage, whether you are still single and just starting a career, raising a family, preparing for retirement or spending down and/or passing on your wealth in retirement. Typically, the younger a person is, the more aggressive he will be in terms of return targets and risk preference.

Knowing who you are as an investor also requires that you articulate and quantify what you are investing in and the levels of risk you are willing to take.

A professional adviser like a registered financial planner, or RFP, can help you with this process.

Know the fund

If you visit www.pifa.com.ph/factsfignavps.asp, the website of Philippine mutual funds, you will see that ALL Philippine mutual funds are already categorized according to their investment objectives. You will also see their current selling prices or net asset value per share (NAVPS) together with their investment performance on a year-to-date basis as well as rolling one-, three- and five-year bases.

The returns posted are on a gross annual compounded basis as they still have to take into account your entry (sales) and exit (redemption) fees, if applicable. It is also important to note that if you already own mutual funds, the investment returns posted are not yours. Your return is the quotient arrived at by dividing the current NAVPS of your fund, less applicable exit fees, by your cost of acquisition, inclusive of entry fees you paid.

If you are still looking for a fund to buy and you see one you like in the Philippine mutual fund website, go ahead and click the name of the fund and you will be brought to the page containing that fund’s contact details. Contact the fund or visit their website and ask for their prospectus. By SEC regulation, all prospective investors in mutual funds must be provided a prospectus prior to investing.

In reviewing the prospectus, you can focus on the following:

– investment objective

– risks in investing in a particular fund

– investment management and bonus fees, in case of asset management firms

– other fund operating expenses like fund administration, transfer agent, custodian, audit and legal fees

– entry/exit fees covering the period they are applicable

– track record of the fund and the asset management company

– background of the officers and directors of the fund

– background of the officers and directors of the asset management company

Remember to match your own investment objectives and risk preference with those of the fund that you are contemplating on investing in. If you are a long-term investor, you should not discount a fund that has minimal or no entry fees but high exit fees. Usually, the exit fees go away the longer you stay invested. So if you are in for the long term, you will likely not be charged the exit fees.

To find out the latest developments on mutual funds, you may also want to buy an SEC iView load. In the comfort of your home, you can log on to the iView page of the SEC (www.sec.gov.ph/onlinetransactions/seciview.html) and view the financial statements and special reports submitted by mutual funds and all SEC-registered companies for that matter. The minimum amount of load is P100 and is valid for one year from date of purchase.  Each page you view deducts P0.20 from your load and each page you print deducts P5.00 from your load.

To help you know yourself more, download Ya!man, the country’s first free personal finance mobile app from www.personalfinance.ph. Ya!man helps you track a week’s cash flow, compute the effective interest on your loans (i.e. whether loans are on diminishing balance, add-on-rate or 5-6), determine the sufficient amount of life insurance for you, and compute the future cost of your child’s college education and your retirement. You can even ask for additional personal finance tips from a personal finance expert. All these are for free.

To know more about mutual fund investing, you may also attend the public run of EnRich on Feb. 16. Visit www.personalfinance.ph or call 2161541/3593094 for details.

(Efren Ll. Cruz is a registered financial planner of RFP Philippines. Questions may be sent by SMS to 0917-5050709 or to efren@personalfinance.ph. Attend free personal finance talk to know how to become RFP on Jan. 31 at PSE Ortigas 7 p.m. Register at info@rfp.ph.)

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