MUTUAL FUND- A mutual fund is like a big basket filled with different types of investments like stocks and

bonds. Instead
of choosing individual investments, investors put their money together into this basket. A professional fund manager then
handles all the buying and selling of investments inside the basket, aiming to make money for everyone involved. Because
money is spread out among many investments, it reduces the risk while maximizing the earnings potential of the money. A
mutual fund may be invested in not only local but also in Retail Estate Investment Trusts (REITs) and global stocks!

How Are Earnings Calculated for Mutual Funds?

Investors typically earn returns from a mutual fund in three ways:
1.​ Dividend/interest income: Mutual funds distribute the dividends on stocks and interest on bonds held in its portfolio.
Funds often give investors the choice of either receiving a check for distributions or reinvesting earnings for
additional shares in the mutual fund.
2.​ Portfolio distributions: If the fund sells securities that have increased in price, the fund realizes a capital gain, which
most funds also pass on to investors in a distribution.
3.​ Capital gains: When the fund's shares increase in price, you can sell your mutual fund shares for a profit in the
market.

ADVANTAGES:
1.​ 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. 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 people invest in a mutual fund, they achieve instant diversification because
the fund is usually invested in a wide array of securities.
2.​ LIQUIDITY- Liquidity is the ability to readily convert investments into cash. Other investment products require
investors to find a buyer so that they can liquidate their investment. 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 wi-thin a day. Mutual funds are, therefore, considered
very liquid investments.
3.​ POTENTIAL HIGHER RETURNS- Mutual Funds provide higher returns than a savings account being diversified
and professionally managed. 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 under management, it can negotiate for lower
stockbrokerage fees or command higher interest rates on fixed-income investments. In the end, however, it is still the
investment adviser who really makes the big difference between making direct investments and investing in mutual
funds because very few individual investors can match the experience and skill of full-time professional fund
managers.
4.​ Low Capital REQUIREMENTS- Investors can open a mutual fund account for as low as Php 1,000 only. Direct
investments usually require substantial capital. The minimum investment amounts for Treasury Bills and commercial
paper, for instance, range from Php100,000 to Php1 million depending on the bank or investment house you are
dealing with. In contrast, most mutual funds in the Philippines require a minimum initial investment amount of only
Php5,000.00 and minimum additional investments of Php1,000.00. Some Funds even offer lower minimum initial
investment.
5.​ 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.

DISADVANTAGES
1.​ CASH DRAG- Mutual funds require a significant part of their portfolios to be held in cash to satisfy share
redemptions each day. To maintain liquidity and the ability to accommodate withdrawals, mutual funds typically have
to keep a larger percentage of their portfolio as cash than other investors. Because this cash earns no return, it's called
a "cash drag."
2.​ HIGH FEES, COMMISSIONS, AND EXPENSES- Remember that mutual funds also bear fees. As with any
business, running a mutual fund involves costs. For example, there are costs incurred in connection with particular
investor transactions, such as investor purchases, exchanges, and redemptions. There are also regular fund operating
costs that are not necessarily associated with any particular investor transaction, such as investment advisory fees,
marketing and distribution expenses, brokerage fees, and custodial, transfer agency, legal, and accountants’ fees. Fees
reduce overall payout from a mutual fund are assessed whatever the performance of the fund. Failing to pay attention
to the fees can cost you since actively managed funds incur transaction costs that accumulate and compound year
over year.
3.​ Dilution- Dilution is also the result of a successful fund growing too big. When new money pours into funds with
solid track records, the manager could have trouble finding suitable investments for all the new capital to be put to
good use.
4.​ End-of-day trading only- A mutual fund allows you to request that your shares be converted into cash at any time.
However, unlike stocks and ETFs that trade throughout the day, mutual fund redemptions can only take place at the
end of the trading day.
5.​ Taxes- When the mutual fund manager sells a security, a capital-gains tax is triggered, which can be extended to you.
ETFs, for example, avoid this through their creation and redemption mechanism. Your taxes can be lowered by
investing in tax-sensitive funds or by holding non-tax-sensitive mutual funds in a tax-deferred account, such as a
401(k) or IRA.

TYPES OF MUTUAL FUNDS

1.​ STOCK FUNDS- Stock funds are basically designed for “growth”, to earn from capital gains and dividend yields.
This is usually recommended for those investors who have long-term financial goals such as children’s education,
retirement fund, funds for future business, and others.
2.​ BOND FUNDS- A bond fund, also called a debt fund, is a pooled investment vehicle that invests primarily in bonds
(government, municipal, corporate, convertible) and other debt instruments, such as mortgage-backed securities
(MBS). The primary goal of a bond fund is often that of generating monthly income for investors. Bond funds can be
good guards against inflation and it can preserve (though not be guaranteed) your money value for the short-term.
This is for the conservative investors who are risk-averse, who do not want to subject their money in market
volatilities, thus opting for a safer investment instrument, yet protecting it against the effects of inflation.
3.​ MONEY MARKET FUNDS- A money market mutual fund is a type of mutual fund that invests in high-quality,
short-term debt instruments, cash, and cash equivalents. Though not exactly as safe as cash, money market funds are
considered extremely low risk on the investment spectrum and thus carry close to the risk-free rate of return. Refers
to an Investment Company that invests in short-term fixed income securities with a portfolio duration of one (1) year
or less.
4.​ BALANCED FUNDS- Refers to an Investment Company that invests in both equity and fixed income instruments.
The respective investments in either equity or fixed income shall not be less than thirty five percent (35%) but not
more than sixty five percent (65%) of the NAV of the Investment Company.