Mutual Fund Basics

A mutual fund is a collective investment managed by a professional fund manager which are invested in stocks, bonds, money market and other financial instruments.

For example,  there are 12 person who invested P1,000 each to start a mutual fund. The fund is named InvestPhil Fund. The total initial fund, which amounts to P12,000.00, are divided into 120 shares. Each investor will have 10 shares each at P100 initial worth or initial Net Asset Value Per Share (NAVPS). The fund manager of InvestPhil invested it in various securities like stocks, bonds and etc. In return, the fund manager will deduct 1% of the total value annually before calculating NAVPS for his effort. This is the same in real case wherein the daily NAVPS are net already or calculated after fund manager's fee was deducted.

After 1 year, the total value of InvestPhil Fund have grown to P24,000.00 after fund manager's fee deduction. This means that the NAVPS  after a year is P200/share (P24,000/120shares). If one of the investor wanted to redeem his shares, how much do you think he can get? Since he has 10 shares then the total claim will be P2,000.00 or 100% gain.

Normally, mutual funds have 6 months retention period which means money invested when reclaim in less than 6 months are subjected to early redemption penalty. This is around 1-2% depending on the institution. Going back to the example, assuming one investor wanted to claim his share after 3 months, which is less than the retention period of 6 months, and during that time the NAVPS is P150 per share then the total amount of his shares is P1,500.00. However, 1% penalty will be deducted (P1500 x 0.01), so the amount he will get is P1,485.00.

Aside from the fees mentioned, some institution requires Entry Fee and/or Sales Load. This  is one important factor in carefully choosing a mutual fund since additional fee  have an impact in the profitability of your investment. Of course, if the fund is performing well, these extra fee might be negligible and worth it.

In the Philippines, initial investment in mutual fund will range from P5,000.00- P50,000.00 depending on the institution.

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