by: Edmund Yao Lao, RFP
Mutual fund has been one of the better alternatives to just saving money in the bank. Gone were the days when time deposits were as high as 22% per annum. Nowadays, banks are good only for safekeeping your hard-earned money. Growing your money through the bank to reach your goals is next to impossible.
Investing in mutual fund does not guarantee a return. Past performance can be a gauge but can never guarantee future return. Past performance will allow us to see how well the fund managers made our money grow.
Investing requires one to align it to his goals, risk profile and the timeline to his goals. He has to carefully determine the future value he needs so that he can project how much to invest regularly.
Why are mutual funds preferred over other instruments?
1. Time constraint. There are people who are too busy with their work that they do not have the time to study how the other instruments can work for them. Without knowledge and expertise, they will definitely fail miserably. It is better for them to have a professional manage their money so they can focus on their daily routine. Leaving it to an expert is a form of leverage where the investors use other people’s effort to grow their money.
2. Inflation. Unless the growth of money is higher than inflation, it is definite that the investor will need more money to buy the same item that he needs. He needs to work harder and longer just to be able to earn more. By investing at a higher return, he needs less effort to make more as it is his money that will be working to make more.
3. Economy of scale. An ordinary investor who wishes to invest in instruments such as bonds or stocks may not have that much money to get in. He will lose the opportunity as he only has a small purchasing power. By joining a mutual fund, he is joined to a big pool of fund that exposed to the instrument previously inaccessible to him when he was alone. This is similar to the saying “united we stand, divided we fall”.
4. Business. When one invests in a mutual fund, he is already a business owner. A lot of people dream of having their business. Unknown to them, for only Php 5000, they become part owner of a mutual fund (which is a corporation). They become business owners where board of directors, fund managers, and staffs work for them and make their money grow. This is the same as a traditional business owner who has people working to make money for him. The only difference is that while his money grows he does not get pestered by BIR inspectors. Imagine, investors are stockholders and they receive annual repost from the mutual fund company.
5. Economic growth. Not all may know this. As we invest in mutual funds, we help companies grow via bonds and IPOs. Companies need money to expand and they either use bonds or stocks to generate the needed funds. In effect, mutual funds indirectly help companies expand and create jobs and also help government get revenues via tax. Specially in equities, the more we invest, the less we depend on foreign investment to keep continue on its bullish trend.
Wouldn’t it be great to invest in mutual funds? The more we invest, the more we benefit as individuals and as a country.