Ever since the creation of mutual funds, it has become one of the most common and popular investment vehicles for the small investors. So simple is the concept that even prospective investors with limited knowledge can have the benefit by simply entrusting his excess money to the mutual find company. This is part 4 of our “Mutual Fund Series.” Let us now look at some of the advantages a mutual fund can give to the investors.
One important rule of investing, for both large and small investors, is asset diversification. Diversification is all about the mixing of investments within a portfolio and is used to minimize risk. An example of diversification is buying different stocks from different industries such that the possible loss one can be offset by the gain in the other. As the saying goes, never put all eggs in one basket. By purchasing mutual funds, you have the immediate benefit of instant diversification and asset allocation without having to shell out large amounts of cash needed to buy individual portfolios.
2.Economies of Scale
When we buy items specially in bulk, the price is much lower than by buying in piece. With mutual funds, because of the size of the pooled investors monies, these funds are able to take advantage of their buying and selling size and thereby reduce transaction costs for investors. When you buy a mutual fund, you are able to diversify without the numerous commission charges as charged you buy different stocks. If you want to diversify and had to buy 10-20 stocks, the commission charges alone would eat up a lot from your money. With mutual funds, you have the opportunity to make the same large transaction for less cost.
When investing in the stock market, most investors don’t have the exact sums of money to buy round lots of securities. Five thousand pesos is usually not enough to buy a lot of a stock. By investing in a mutual fund, investors can purchase mutual funds in smaller amount (minimum one thousand pesos) after opening their account. This provides investors the ability to make periodic investments through monthly purchase plans while taking advantage of cost averaging . Instead of having to wait until you have enough money to buy high priced securities, you can get in right away with mutual funds.
Another advantage of mutual funds is the ability to buy and sell it with great ease. Mutual fund companies can buy back the shares you want to sell back any time you want. However, take note that there are holding periods and if the redemption is within the holding period, there are corresponding charges. Contrary to stocks and ETF, which trade any time during market hours, mutual funds transact only once per day after the fund’s NAVPS is calculated (usually at the end of the day).
5. Professional Management
When you buy a mutual fund, you are in effect hiring a fund manager and his job would be to use the money that you invest to buy and sell stocks that he or she has carefully researched. You are leveraging on his expertise, effort and time to grow your money. You can go on with your daily routine and let the fund manager do his part in growing your portfolio.
6. Tax benefits
Investments in mutual funds are not subject to with holding tax anymore. This allows the investor to enjoy all his investment as compared to deposit accounts where the interest is taxed 20%. Money is not taxed is best left to compound to maximize it.
When you buy a mutual fund, you have a potential to get a higher return, and in effect outpace inflation. Inflation is our money’s silent killer. Inflation erodes the value of money. Bank products nowadays give a yield way below the inflation . Choose a mutual fund with a good track record so that your money will retain its purchasing power over time.
Edmund Lao is a Registered Financial Planner who has a passion to help Filipinos invest and right way and avoid being scammed. He is known by many as the “SCAMCROW” loved by investors feared by scammers. His passion is to save Filipinos from scams and teach them to invest properly in stocks, bonds, and mutual funds. He owns the website wealth-wonder-boy.blogspot.com.
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- February 18th Stocks vs Forex
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