Sunday, January 15, 2012

Why Mutual Funds?


As a new investor, investing in the mutual fund is the easiest and least stressful way to invest in the market, relying the investing in the capable hands of financial experts.

Among the benefits of mutual funds are:
1. It is so diversified. There is a specific allocation of the kind of investment entered to, in each type of funds. For example in Stock or Equity Fund, there is a mandate that just 10% shall be allocated for each industry, like for the 10% in banks, the Fund will buy blue chip companies like Banco de Oro, BPI , etc.
2. It is managed by a professional money manager who constantly monitors the stocks or bonds in the fund, so you can rest assured that it is on good hands. This is the manager's primary job so he has a lot of time in the research and in the selection of what investments to buy or sell, compared if you or the individual investor does the managing himself.
3. It is so liquid. If you want to redeem your shares, you will have the money in
5 to 7 working days. If you look at the chart below, you will notice that a 10% is allocated for cash, this explains why its easy to convert our Fund shares. This 10% cash allocation is for investors who wants to redeem.
4. It is tax free. What could be a better incentive than being tax free?
5. It is safe, as it is regulated by the Securities and Exchange Commission (SEC).
6. It is affordable. With a minimum of P5,000-, one can start investing in mutual funds and a minimum succeeding investment of just P1,000-. And you can add money to your Fund, any time you want and there is no requirement that you should do it monthly or what, everything depends upon you. Although, the ideal is to follow the Peso Cost Averaging concept. (I'll discuss this in another post.)
7. It is so convenient, as after opening your account through your broker or the company itself, additional investments can be done through the banks via deposit.

This is how a typical type of Fund is allocated in their respective funds. From the illustration, the Bond Funds are invested in 20% CP"s (commercial papers), 20% T Bills (treasury bills), 20% FXTN's (fixed rate treasury notes), 30% Notes, and 10% Cash. The Stock Funds on the other hand, has allocated 10% of their funds to the different industries or categories, like the media stocks, IT ( information technology), Holdings, like Ayala Corporation, Mining, Telcos, real estate, banks, and cash. And of course, the Balanced funds allocates 40% for equities (blue chip stocks), and 50 % for Government securities, aside from the 10% Cash.

What is a Blue - Chip Stock? A blue chip stock, according to Investopedia, is defined as "Stock of a well-established and financially sound company that has demonstrated its ability to pay dividends in both good and bad times." So, there we go, investing then on Stock or Balanced Funds gives you the security that you are part owners of blue chip companies, like PLDT, Metrobank, Meralco, BPI, to name a few.

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