In my previous post, i have explained that a Mutual Fund is an investment company that pools the funds of many individual and institutional investors to form a massive asset base. Think of mutual fund similar to group buying sites. A fund manager pools or collects money from different individual and invests them in various companies. In group buying sites, the site gathers individual buyers to form a group and have to power to bargain for lower cost. Similarly, investing mutual fund allows you to have exposure in various companies and industries otherwise you cannot purchase by your own.
Let's take for example Sunlife's Balanced Fund. As of February 28, 2011, the fund has the following companies as part of its Top 5 Equity Holdings. If you want to buy all of these companies on your own, you'll have to have P23,518 on the minimum.
However, with Mutual Fund, you can gain exposure for the same set of companies for just P5,000 pesos.
How does Mutual Fund work?
Assuming you are interested to invest your P5,000 in Sunlife Mutual Fund, you'll get 1,986 shares based on the fund's Net Asset Value Per Share (NAVPS) of 2.5165 as of March 23, 2011. This means you own that number of shares of the Mutual Fund Company. Remember, you will not directly own the five companies listed above. Instead, you'll get shares of the Mutual Fund Company who in turns owns the shares of the listed companies.
How will you earn or (lose) in Mutual Fund?
NAVPS fluctuate daily depending on the performance of the Mutual Fund which is related to the performance of the companies that the Mutual Fund Owns. You will earn when NAVPS increase and you will lose when NAVPS decrease. For example, if you joined MF last February 3, 2011, the NAVPS was 2.4845. Using the March 23, 2011 NAVPS, you could have earned P64.40 or 1%.
On the other hand, if you joined last January, you will lose P226.13 or 5%.
The numbers might not appear to interesting but if you think longer horizon, the numbers are more attractive. Back in January 4, 2010, the NAVPS was 1.9888 so you could have earned 27% return in one year.
One advice that i got was peso cost averaging. Read it here
Summary
Mutual Fund's is a good way to have investment tool because your money will be managed by fund managers (who does that as a career) and will not require too much money.
