It's January 3, 2010 and you are ask to choose between
a) Invest P50,000 in a BPI Savings Deposit
b) Invest P50,000 in Sunlife's Mutual Fund
what would you choose?
If you choose a, you will end up with P50,687.50 on January 3, 2011 while choosing b will net to having P64,909. (using BPI Savings annual rate of 1.375% and Sun Life's Balanced Fund Net Asset Value as 1.9888 and 2.6357)
It appears that choice b is the better option. However, the decision is easier since we have not considered the risks. With choice a, you are guaranteed on the returns while the returns on mutual fund is not guaranteed.
However, will all the positive outlook in the country, i bet option B is less risky.
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 simpler explanation, it is like everyone gives his/her share to a fund manager and that fund manager invests the money in security investments
Why Invest in a Mutual Fund?
Interest rates can be volatile and passive short-term investing can erode investment values due to inflation. On the other hand, the stock market has historically outperformed both short and long-term bank deposit rates. Unfortunately, not so many people are familiar with active financial management and effective diversification. Through mutual funds, even investors with limited resources can participate in combinations of these high-yielding investment instruments without the headache of personally selecting and monitoring a portfolio.
Mutual funds are ideal vehicles for growing money over time. It can be used as a savings medium for retirement, education for a child, or building up a long-term cash fund for some specific future financial objective. While largely thought of as a retail financial product, mutual funds are also ideal instruments to augment the yields generated by organizational funds and enhance their level of diversification. Mutual funds have been popular investments for pension and trust programs, other employee benefit funding objectives, and institutional asset-liability matching.
Mutual Funds are another way to build money over time. Personally, i only started last year where my P30,000 growing to P45,000 at the end of 2010. This year, i started to put small amount every month as part of peso cost averaging. Learn about peso cost averaging here.
