Do’s and Don’ts When Investing in Mutual Funds


In one of my previous posts, I mentioned about what to look for when buying mutual funds. Once you bought and invested your hard-earned money into mutual funds, then what’s the next step?

In my pursuit for further financial education, here are the do’s and don’ts of mutual fund investing:

WHAT TO DO WHEN INVESTING IN MUTUAL FUNDS:

– Pick funds that have a proven track record and a manager who has been around for more than five years.

– Pick funds that meet your investment objectives and risk tolerance.

– Select no-load funds, all other things being equal. If you’re interested in a load fund, make sure its performance is worth the fee. Here in the Philippines, UITFs are considered as no-load funds.

– Invest primarily in equity (stock) funds if you want growth. Although risky, equity funds provide the best returns as long as the stock market is performing well.

– If you’re comfortable bypassing a securities dealer, buy shares directly from the fund or bank to avoid paying sales charges. Discount brokers offer reduced sales charges. Mutual fund agents usually get the sales loads deducted as their commissions.

– Invest in four or five funds for diversification. As they say, don’t put all your eggs in one beasket.

– Unless you need the income, reinvest dividends.

– Keep all of your fund statements for your tax records.

WHAT NO TO DO WHEN INVESTING IN MUTUAL FUNDS:

– Don’t invest in a fund if you haven’t reviewed its prospectus and performance history.

– Don’t panic. The worst thing you can do is sell when the market’s dipping, and buy when it’s high.

– Don’t buy aggressive-growth funds if you’re averse to risk.

– Don’t switch back and forth between funds, trying to catch the next wave. By the same token, don’t rest on your oars and stick with a fund that isn’t performing or that changes its objectives. Seek the advice of a financial planner.

To get articles, you can subscribe using your favorite RSS feed reader or have them delivered directly to your email address.


Tyrone is a passionate financial literacy advocate. He started this blog on November 2008 when he watched The Secret which talked about Law of Attraction because he wanted to become a millionaire and wanted to know how a millionaire acts. At the age of 26, he achieved his first million. To find out more about him, click here or follow him at Instagram

17 responses on “Do’s and Don’ts When Investing in Mutual Funds

  1. I haven’t gone into the arena of mutual funds yet. But if my plans* push through favorably and thus eventually allow me to do full time blog work, then I’d have more extra time on my hands. Then perhaps I’d start educating myself about forex and mutual funds and all these things that people are raving about. I actually have a folder of saved pages about a variety of things…from brainwave entrainment to foreign exchange to C++, waiting to be pored over when I have the time. These page goes to one of those folders for future reference. 🙂

    *(I’m hoping to quit my day job as soon as my monthly online income matches my monthly salary).

  2. Nice post Tyrone! I just realized it’s been almost 2 years since I started with balanced and equity mutual funds. I’m glad that they have finally recovered and already show some profit. However, I’m contemplating on unloading half of it for the experiment I mentioned to you about growing a small amount of money through the stock market. I’ll probably do it this coming 2010 when I will finally have the time to do so. 🙂

  3. WHY INVEST? To Beat Inflation & Achieve Financial Goals
    WHERE TO INVEST? Depend on your Investment Goals
    Short term goal -invest in short term instrument. Long term goal -invest in long term instrument!
    The RISK-RETURN Trade-off: Low Risk=Low Return; High Risk=High Return.
    KNOW THE RISK! ROR is dependent on the amount of risk you assume.
    RISK WHEN CALCULATED BECOMES NO RISK…
    RISK BECOMES OPPORTUNITY… increase your Intelligence such that it lowers the Risk
    INVESTMENT GOALS: House, Kid’s Education, Retirement, Car
    …all long-term, but why most of your investments are in short term instruments?
    Earn->Spend? or Earn->Save…Save…Save->Spend?
    Spend kid’s education & retirement today to midnight sale, party, travel, gadgets?
    BANK SAVING IS NOT INVESTING… money that you can easily withdraw in “small excuse” or false emergencies – gimmick, partying, sale, outing?
    INVESTING IS A LONG-TERM COMMITMENT TO YOUR GOAL!
    Investing is not one-time… it’s a habit, a long-term process of put & put, not put & take.
    – A commitment that you will not touch that money for other purpose!
    – A commitment to continuously invest… until you get what you want!

    There are many ways to invest: mutual funds, stocks, bonds, UITF, long-term healthcare, investment in insurance, savings & time deposits, real estate, etc. You name it, & someone will sell it to you.
    Be careful. When you get into the area of more “sophisticated” investment, you may need some advice & direction in order to make good investment choices. There are basic rules you must consider.
    Rule #1: If your investment goes into “loanership investments” (savings, time deposits, cash values), your return will be low (1-4%).
    Rule #2: If your investment go into “ownership investments” (mutual funds, stocks, equities), your return may be as high as 12% or more. There are no guarantees. If you want to maximize your return on investment, you have to accept some risk.

    If you invest directly in stock market,
    -You need to gain extensive knowledge in the stock market. You need the time & expertise to select, combine & monitor the stocks in your portfolio.
    – Know how to analyze which stocks are “good” & which are “bad.”
    Do you have capability & resources to get the right information before it makes the news? If you get your news from other people or newspaper… you may “buy” or “sale” too late.
    Managing a stock portfolio is a complex process that is best left to professional fund managers… Utilize a concept of investment that provides professional money management, an investment concept called mutual funds.

    • Mutual funds are among the most popular financial planning vehicles in the USA. More than 80% of Americans own mutual funds. There are more than 7,300 mutual funds today with a total net asset of more than $7 trillion.
    • Mutual funds industry in the Philippines is still very small. Very few Filipinos own mutual funds. There are only about 30 mutual funds in the Phils.

    Mutual fund is an investment company that combines money from individuals & invests in a diversified portfolio of securities.
    Each investor is a shareholder who buys shares of the fund.
    Each share represents a proportion of ownership in the fund’s assets.

    Because hundreds of its shareholders have chosen to pool their money in a given mutual fund, the fund can easily diversify its investments among the stocks & bonds of many companies.

    MUTUAL FUNDS ARE USUALLY CLASSIFIED INTO:
    1. BOND FUND – funds that invest in government securities.
    2. STOCKS/EQUITY – funds that invest in a variety of stocks & equities. Aggressive in capital growth –deals with equity investments that are generally blue chips or growth stocks listed & traded on the Philippine Stock Exchange.
    3. BALANCED – combines profitability of equity investments & the stability of fixed-income instruments.
    MUTUAL FUNDS PROVIDE THE FOLLOWING BENEFITS:
    1. PROFESSIONAL MANAGEMENT – the most important advantage!
    • Mutual funds take the stress away from small investors who want to invest in the financial markets. This is because the mutual funds are handled by competent professional fund managers who choose the right investment for them. Investing directly in the stock market is risky.
    • The sales charge (entry fee) you’ll pay when you first invest is a small price for the security of having team of professionals actively & constantly monitoring the stocks & make the investment decisions.

    2. ACCESSIBLE & AFFORDABLE… Easy to buy… Offer wide variety of services to meet shareholders’ need — variety of investment minimums allowing participation at affordable amount.
    3. LIQUIDITY… Your money is always available. No need to find a buyer. The fund is always ready to buy back its shares from you. Mutual fund shares can be redeemed and collected within 7 days at the prevailing Net Asset Value per Share (NAVPS).
    4. NET OF TAX… Harness the power of tax advantages!
    5. DIVERSIFICATION… To help reduce the risks inherent in any investment, a mutual fund carefully selects a diversified portfolio. A diversified investment portfolio that contains a number of different types of investments tends to have a lower level of risk than a portfolio with more similar types of investments.
    6. ASSET ALLOCATION… The process of developing a diversified portfolio by mixing different asset classes –such as stocks, bonds, & cash equivalents –in varying proportions to help reduce risk & maximize potential return.
    7. MONEY COST AVERAGING… Money cost averaging advocates the investment of a constant money amount, regardless of the price of the investment. Over a period of time, this generally results in a lower purchase price per investment than if the total purchase was made at one time.

  4. This is a fantastic article on investing in mutual funds. One of the ways to measure risk of mutual funds is by looking at the portfolio turnover. Here’s more info on this topic. A mutual fund’s portfolio turnover is the percentage of stocks, bonds & other securities that are bought and sold during the course of one year.
    Source: http://www.bestperforming-mutual-funds.com/mutual-fund-portfolio-turnover.html

    For example, consider a hypothetical ABC Fixed Income fund reports a portfolio turnover of 40% for the year 2010. Assuming the fund held 100 stocks at the beginning & ending of the year, it will have sold 40 stocks during the course of the year and replaced them with 40 newer stocks.

    The article also breaks down the risk factors of small cap mutual funds, index funds & fixed income bond funds.

  5. One more thing to consider is the annual fee charged by each fund. It’s a pity that there aren’t any passive funds offered here in the Philippines. The lowest annual fee I’ve found so far is 1.5%. A passive index fund (one that mirrors the performance of the stock market index) should have an annual fee of less than 1%.

  6. I’m guessing you’re referring to BPI’s PSIF? It has a 1.5% annual fee but it still tracks
    the PSEi almost perfectly. How? It doesn’t really count the dividends it gets as part
    of the NAV and instead they use that to pay for the annual fee.

    Anyways, there are active funds with 1% annual fees

  7. I had no urgency to strategize the financial aspect of my life. Then came 2008, where it became the turning point to literate myself financially. This post has been a great help in literating Filipinos about mutual funds. Keep on posting!

  8. The term mutual fund is less widely used outside of the United States and Canada. For collective investment vehicles outside of the United States, see articles on specific types of funds including open-ended investment companies, SICAVs, unitized insurance funds, unit trusts and Undertakings for Collective Investment in Transferable Securities, which are usually referred to by their acronym UCITS.

Leave a Reply

Your email address will not be published. Required fields are marked *

19 − 9 =