What is a Mutual Fund?

There are a number of ways to keep your money.

Aside from the usual savings and time deposit, you may have heard (or not) of an instrument called mutual fund.

This industry is relatively young in the Philippines as compared to older economies like the United States.

I visited www.icap.com.ph, the official site of Investment Company Association of the Philippines and here is how they defined Mutual Fund.

What is a Mutual Fund?

A Mutual Fund is an investment company that pools the funds of many individual and institutional investors to form a massive asset base. The assets are then entrusted to a full time professional fund manager who develops and maintains a diversified portfolio of security investments. People who buy shares of a mutual fund are its owners or shareholders. Their purchases provide the money for a mutual fund to buy securities such as stocks and bonds. A mutual can make money from its securities investments in two ways: a security can pay dividends and interest to the fund, or a security can rise in value. The fund passes any dividends, interest or profits on the sale of its portfolio securities, less fund expenses, to shareholders in the form of distributions.

In the Philippines , there are currently four basic types of mutual funds---stock (also called equity), balanced, bond and money market funds. Bond funds invest primarily in bonds such as treasury notes issued by the Philippine government and commercial papers issued by reputable companies in the Philippines . Having a full basket of only fixed-income securities, bond funds provide capital preservation while maintaining a conservative stance in terms of asset allocation. Like bond funds, money market funds also have a conservative stance since they have a full basket of fixed income funds. The main difference lies in the term of investments of money market fund investments, which is one year or less. Equity funds invest primarily in shares of stock issued by Philippine corporations. The dominance of stock issues within the portfolio positions the fund to attain a more aggressive rate of growth. Balanced funds invest in both shares of stocks and bonds, thereby accessing the growth potential of stocks tempered with the presence of secure fixed-income instruments. Professional fund managers create value for shareholders by providing superior yields within controlled risk exposures. Certainly, expective in both security selection and asset allocation go a long way in ensuring better long-term rewards for mutual fund investors. (Source: Investment Company Association of the Philippines)