This is Part 3 of our Mutual Funds series, where in the past we have discussed the minimum amount needed for mutual fund investing and the risks entailed to invest. As there are risks in mutual fund investing, there are also rewards as well. As the saying goes, the higher the risk, the higher the rewards/potential loss.
Mutual funds investing have gained popularity nowadays , owing to the double-digit gain it has produced every year after the last Global Crisis which was brought about by the sub-prime crisis (due to GREED) in the USA.
Unlike bank products, investing in mutual funds is not guaranteed. Because of this nature, an investor has the potential to have a better, if not the best, return for his money. To avoid a scenario of disaster, it is advisable that only excess money must be invested so that whatever may happen will not have a negative impact on the current financial situation of the investor.
What are the potential gains in mutual funds investing?
1. Capital gains. By investing in mutual funds, your money is converted to shares with the corresponding share price. As you stay invested until you reach your goal, there is a potential for the share price to appreciate. Appreciation of price in mutual funds result to compounding return, meaning your past gain earns more gain for you if you remain invested, most of the time the gain outpaces inflation.
2. Dividend gains. Thers are mutual funds that are focused on companies that give dividends. However, the dividend gained is pooled back into the fund in the form of share price increase, which results to capital gains.
3. Tax-exempt. Mutual fund gains are not anymore subject to withholding tax. Whatever the value of the shares at the time of redemption, the investor gets the full amount. Less taxation will mean more money for the investor. Unlike with deposit accounts where the interest gained is taxed 20%. The tax-exempt feature of mutual funds translate to a gain in the investment. Under PERA, investment in mutual funds (200k for OFW and 100k for non-OFW) will result to a 5% reduction in the income tax.
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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