You have been browsing the internet for a long time looking for different investments that will suit you. Until you read about investing in mutual funds and why it can be a good choice.
However, as soon as you dig deeper, you were able to encounter some confusing information. Pieces of information that somehow contradicts in some way to each other. As a result, you are doubtful to invest in it. But before you decide on totally eliminating mutual funds as one of your options. Let me debunk some of the common misconceptions about mutual funds.
Here they are.
Common Misconceptions About Mutual Funds
1.) Mutual funds are too risky
Any investment has a certain risk involved. And the mutual fund is not exempted from it. In the case of mutual funds, it is affected by market volatility. However, since mutual funds are invested in different stocks and some are not invested only in stocks, the risk is being minimized.
How does the risk being minimized? It is through diversification. The money that you invested will be used to buy shares from different financial instruments. This will depend on what type of mutual funds you chose.
You might be thinking that it would be better to just put your money in the bank. Yes, it is safer. But, not totally safe. This is due to inflation. The buying power of your money will be less in the future. Meaning, for the same amount of money you can buy fewer kinds of stuff in a few years from now compared today. Putting your money in the bank is great for your emergency fund.
2.) Mutual funds need a large amount of money
This perception about mutual funds that you need tons of money before you can start is also common. Investing in mutual funds nowadays is more affordable unlike from the previous years. In the past, the minimum initial amount is Php 5,000. Fortunately, today for as low as Php 1,000 you can already open a mutual fund account and the lowest amount you can top-up is Php 500. But this is not applicable to all funds that are being offered by mutual fund companies.
Though with minimum principal amount of money, it may took many years before you can achieved the desired earnings. That’s why, it is good to start early as you can and to invest consistently.
3.) Mutual funds are long-term investment only
Not all mutual funds are for long-term investment only. Other types of mutual funds are designed to cater to short-term and medium-term investments also. That’s why it is very important that when you invest in mutual funds, you should identify first what is your purpose or your financial goal (aside from risk and investment horizon).
After defining your financial goal, you can then assess which type of mutual fund you should avail. If you want to have a higher profit and a long investment horizon is not a problem, you can opt to invest in an equity fund. But, if you do not have the luxury of time and your purpose is income preservation then investing in a money market fund can be a good option.
4.) Mutual funds are all invested in equity or stock
Mutual funds are invested in different financial instruments depending on their type. Some are in stocks, treasury bills, corporate bonds, and government securities. Only an equity (stock) fund that is fully invested in stocks that are listed in the Philippine Stock Exchange.
5.) Investing in several mutual funds eliminate risk entirely
All mutual funds are risky to a certain degree and will vary depending on what type. The most aggressive and the riskiest is the stock or equity fund which is invested in stocks and equities that are known to be volatile. And the least aggressive is the money market fund which is invested in short-term time deposits, corporate bonds, treasury bills, and government securities which are more stable.
Availing different mutual funds does not necessarily mean that you were able to totally eliminate the risk involved. Instead, you are prone to over diversifying. Over diversifying happens when you invested in so many different vehicles or asset classes that are limiting the possibility of any great gains. It does not entirely eliminate the risk just minimizes it. As I have said earlier, any investment has risk involved. It is up to you on what strategy you will do to lessen the risk without compromising profits.
6.) Mutual funds require you to be an investment savvy
You do not have to be technical unlike when you are directly investing in the stock market. Mutual funds are good for those who have little or minimal knowledge in investing and at the same time do not have time to manage it. A fund manager will manage the fund. All you have to do is to determine your risk profile, financial objective, and investment tenure.
On the other hand, being more insightful about market movement or performance is an advantage. This will give you an idea about what will be your next move. Whether topping-up on your mutual fund account is a good choice or maybe it is time to redeem your money.
7.) All top-performing mutual funds are absolutely safe
It is tempting to choose top-performing mutual funds especially if it is being consistent for many years. Yes, it can be an indication that they have some of the best fund managers. However, excellent past performances and track records do not guarantee future returns. While past performance does not necessarily predict future gains or losses, it can tell you how volatile or stable the fund is.
In general, the more volatile a fund, the higher the investment risk. And if you will be needing your money in the near future, you should avoid investing in a highly unstable fund. Why is this so? Because if the fund will poorly perform, you may not have enough time to regain your losses since you need your money. You have no choice but to withdraw your investment.
Here is an example.
8.) Mutual funds are good only for the tax-free benefit
Who does not want to have tax-free earnings? This means additional money going to our pocket. But, this is not just one of the advantages. Aside from being tax-free, the mutual fund has a better rate of returns compared with the banks which have a tax. And is one way of beating the inflation rate. Your money is also safe since it is being regulated by the SEC.
Bottom Line
In any investment, it is always recommended to conduct research before venturing on it. Do not skip this step. Always provide time to study it first. Not just because your friends are investing in it or you have read that it has a really good profit that’s why you want also to invest. Yes, they may be earning a lot from it but it does not imply that you can also gain from it.
Hopefully, you have been enlightened regarding the common misconceptions about mutual funds in the Philippines. Are there are misconceptions that were not mentioned above that you ought to believe before?