I always believe in diversification, it is better to spread our hard-earned money to different financial vehicles that can help us to achieve our financial goals in the future. One financial vehicle that I recommend is Mutual Funds. Let’s define Mutual Fund: A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets The money collected will be managed by the investment company.
How mutual funds work:
1. Professional Fund Management-Managed by professional fund managers who are supported by experienced research teams, with real-time access to crucial market information.
2. Diversification-It will be invested to different asset classes like Equity,Balanced and Bonds which can allow you to diversify.
3.Convenience and Flexibility- You can easily invest and withdraw in any amount and choose to invest affordable, calculated amounts systematically.
4. Transparent and Well regulated- Industry Rules and regulations are reviewed and refined by Securities and Exchange Commission(SEC) to protect investors.
5. Minimal charges-Charges are small that can make your money grow faster. Front load ranges from 1%-2% only while Annual management fees are from 1%-2% per annum.
6.You can choose what risks you can take when you invest. High Risks=High Returns, Mid Risks=Mid Returns, Low Risk=Low Returns. Average returns on high risks fund can give 8%-15% per year after 10 years.
7. Access to different asset classes- You can invest to wide range of portfolios that are cheaper than you buy individual companies or government bonds which sometimes that are not available for individual investors.
Let’s say, an investor would set a goal of P1,000,000 after 10 years if the annual returns will be 8% in Equity Funds. How much should he invest every year?
See the illustration:
The investor just needs to invest Ph69,000.30 per year or Ph5,750.05 per month consistently for him to reach the goal of Ph1,000,000 after 10 years but if you put the same amount in the savings account, you will only get Ph722,954.03 if the bank will give you 1% per year. If you notice that if you just let it grow in Mutual Funds and you will not withdraw it, it will compound itself, it means it will grow more. That’s how Mutual Funds work for you, passive income will work for you.
It is important to understand that you keep investing for your future even if you think that it is small because you will win on peso cost averaging. It does not matter if the market goes up and down but it is how long you stay invested until you reach your financial goals in the future. I advise that do not get Mutual Funds yet if you don’t have enough life insurance coverage first because if death comes or critical illness happens you are protected before you use your mutual fund. Always follow this formula from Saving Money to Insuring yourself to Growing your money to Preservation.
Thank you for reading my blog.