Why Invest In Mutual Funds?
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Filipinos do not save enough. They also do not invest enough. Even people who put away money for long-term goals, such as college, a home down payment or retirement, do so in the least risky ways--in certificates of deposit and accounts paying fixed rate of interest, or in government bonds.
Problem: Investments like these produce returns roughly equal to the combined rate of taxes and inflation.
The only way to beat taxes and inflation--to actually increase your wealth, rather than preserve it--over the long haul is to invest in common stocks.
The problem, of course, is that stocks are risky. So, for small investors, mutual funds are the perfect way to invest in stocks. I invest in them because I don't have the time or the inclination to do the research necessary for individual stock investing.
Mutual funds offer the following advantages to the small, modest investor who wants common stocks:
- Convenience. A handful of excellent mutual fund companies offer a broad range of funds. You can open an account with a single fund family that offers funds that invest internationally as well as domestically, in big companies and small ones and in various styles--such as growth and value. If you choose to invest in them in the future, all your paperwork will arrive on a single statement in one envelope.
- Professional management. The mutual fund industry tends to attract some of the best professional stock pickers in the business. It is no coincidence that three of the most successful money managers of our time--John Templeton, Peter Lynch, and John Neff--each made his mark in funds, rather than private money management. Mutual funds provide the best-lit playing field in the investment industry today.
- Instant diversification. The typical equity mutual fund today has positions in literally hundreds of individual stocks. This significantly reduces your risk of stock investing. You are less vulnerable to the kind of unforeseen event that can batter an individual company's shares. A well-diversified portfolio is less volatile--less prone to wild price swings--than one made up of only a few stocks.
- Affordability. It is possible to begin an investment program with any of several mutual fund families that require an initial investment of Php 5,000 to 10,000 and a minimum monthly contribution of just 1,000 pesos.
- Discipline. Although investing Php 1,000 a month doesn't sound like a lot of money, over time it can grow into a sizable sum--more than 60,000 in just five years. Given the stock market's historic rate of return, it can grow enough to pay for a few years of college 18 years down the road. And--based on a 10% compounded return--it adds up to more than Php 540,000 in the 40 years it would take a 25-year-old to reach retirement age.
- Risk reduction. Stock prices and the value of shares of mutual funds that invest in them fluctuate from day to day and month to month. If you invest systematically, putting in Php 1,000 a month, you tend to even out these price swings over time. This approach, called cost averaging, smooths out price swings and automatically reduces risk.
- Lessons in investing. As you invest regularly and follow the progress of your investments, you will learn more and more about the financial markets.
The most basic lesson you'll learn is that it's easy to say, "Buy low, sell high" but it's hard to do. The natural inclination of people whose investments go up in value is to put in more money... and when they go down, to sell them. By investing the same amount every month, regardless of whether the market is up or down, you take advantage of the fact that stock prices have risen an average of two out of every three years.
By investing systematically and not trying to "time the market," you will also likely have made a lot more money than you would have investing at a fixed rate of interest, and will not have taken on undue risk.
Adapted from: Bottom Line Year Book 1997 based on Don Phillips, president of Morningstar Inc., an independent research company that tracks and rates mutual funds.« View Mutual Fund Articles Read Next Article »