Stocks and mutual funds are not in competition with each other. It’s not whether stocks are better or mutual funds are better but rather it’s about finding what fits you. This article is aimed give you a broader understanding of mutual funds. Among the investment vehicles today, mutual funds are one of the most popular. After the popularity of the pre-need declined, mutual funds emerged as one of the best alternatives for people to build their funds for their future need.
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In layman’s terms, a mutual fund is simply the joining together of money from different people for the purpose of making it earn more than when the person is investing alone. Analogous to this is the bayanihan concept. When we were in the elementary school, we learned about this concept where all men help each other transfer a nipa house from one place to another by carrying it together as a group. Investing in a mutual fund is similar to bayanihan where the pooled money can buy stocks or bonds where the individual does not have the capacity to buy directly into the markets.
How does a mutual fund work?
When we invest in a mutual fund, we entrust our money to the mutual fund company. The money will be managed by a professional fund manager whose job is to make our money grow and outpace inflation.
When we invest in a mutual fund, our money is converted into number of shares by dividing the net investment amount by the price of the share of the mutual fund. So every time we put money, we are accumulating shares in the fund. As the mutual fund is actively trading in the market, it has the potential to grow the share price. The investor realizes the gain when he sells his shares back to the company at the time it reaches his goals. As I have read in a past article, investing in a mutual fund is just like having a mutual understanding with a boyfriend or girlfriend who hold each other’s hands. In mutual funds investing, we can treat is as having a mutual understanding with the company and hold each other’s hands as we jointly pursue our goal.
Another illustration is by comparing the mutual fund with a public transportation. Here the mutual fund can be compared to a PUJ/PUB and LRT/MRT. All of these modes carry pool of people traveling together to their destination. The driver of the vehicle is analogous to the fund manager, whose task is to safely transport people to their chosen destination along the way. If a person drives to his destination, he faces a lot of risk and expenses while if he rides public transport, he spends less and the only risk he faces is the skill of the driver. Same way with mutual funds, there are risks involved that has to be managed by the fund manager. The only direct risk we will encounter is his skill, investing style and decision-making.
In the next article we will discuss the major types of mutual funds!
About Edmund Lao
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.