Advantages of Investing in Mutual Funds

When it comes to investing in the stock market, financial and investment advisers will always caution potential investors that before they place their hard-earned money therein, they should first be all-SET. This means that they should have the Size of funds, Expertise and Time. However, even though a potential stock market investor may not be all-SET, there is still an alternative paper asset that one can invest in — Mutual Funds. Below are the advantages of investing in mutual funds according to the Philippine Investment Funds Association (PIFA) and the Securities and Exchange Commission (SEC) along with my additional comments:

1. Professional Management

One of the main attractions of mutual funds is that it affords its investors, particularly the small ones, the services of full-time professional managers whose job is to analyze the various investment products available in the market and select those that would give the best possible returns to the fund and its shareholders.

2. Low Capital Requirement

Direct investments usually require substantial capital. The minimum investment amounts for Treasury Bills and Commercial paper, for instance, range from P100,000 to P1,000,000 depending on the bank or investment house you are dealing with. This also holds true for stock because while you may be able to buy one “lot” (shares are sold in board lots ranging from 10 shares to 1 million shares depending on the price at which these shares are traded) for as low as P1,000 or P5,000, you may not be able to buy the stock that you really want, especially the blue chip and growth stocks.

3. Diversification

There is a saying that goes, “Do not put all your eggs in one basket.” This adage is especially true in the world of investments which is full of uncertainties. In fact, even King Solomon, the wisest king who has ever lived, said, “But divide your investments among many places, for you do not know what risks might lie ahead (Ecclesiastes 11:2, NLT). There is no such thing as a “sure” thing. An important investment principle that requires holding several securities to reduce the risks associated with investing in individual securities is called diversification. When you invest in a mutual fund, you achieve instant diversification because the fund is required by law to be invested in a wide array of issues and/or securities.

4. Liquidity

Liquidity is the ability to readily convert investments into cash. Other investment products require you to find  buyer so that you can liquidate your investments. That is not the case with mutual fund shares because the fund itself stands ready to buy back these shares at the prevailing Net Asset Value Per Share. While the law provides that redemption proceeds must be given within seven (7) banking days from the date of the redemption request, most funds are able to pay the redemption proceeds within the next day. Mutual Funds are, therefore, considered very liquid investments.

5. Safety

Safety is a very important consideration for most investors. Mutual funds are highly regulated by the Securities and Exchange Commission under the Investment Company Act and its Implementing Rules and Regulations. Mutual funds are prohibited from investing in particular investment products and engaging in certain transactions. They also have to  submit regular reports to  the SEC as well as to their shareholders.

6. Potentially Higher Returns

Because a mutual fund is managed as a single portfolio, it is able to take advantage of certain economies of scale. For instance, with its millions of pesos (or other currency) under management, it can negotiate for lower stockbrokerage fees or higher interest rates on fixed-income instruments. In the end, however, it is still the investment company adviser who really makes the big difference when an individual is faced with this decision — “Will I make direct investments by myself or will I invest in a mutual fund?” Because very few individual investors can match the experience and skill of full-time professional fund managers, the investing public is well advised to invest in a mutual fund instead.

7. Convenience

Mutual funds are purchased directly through SEC-licensed Certified Investment Solicitors (CIS) only. These CIS are usually connected to banks, insurance companies, investment companies, or brokerage firms and normally provide personal, tailor-fit service. Some fund companies have even set up retail centers for investors. Many have payroll deduction plans and some funds, with proper authorization, will deduct and invest on a regular basis a specified amount from the shareholder’s bank account.

Funds offer a variety of services, including preparing monthly or quarterly account statements, automatically debiting additional investments from, or crediting redemption proceeds to, the investors’ bank account; or allowing transfers from one fund to another. Most major mutual fund companies offer extensive record-keeping services to help investors track their transactions and follow their funds’ performance via phone, text message, or the internet.

8. Transparency

Investment company advisers (such as Philam Asset Management, Inc.) provide investors with updated information pertaining to the fund. All material facts are disclosed to investors as required by the SEC.

9.  Flexibility

Investors are allowed to modify investment strategies over time by transferring or moving from one fund to another within a mutual fund family.

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