1. What is a mutual fund?
- A mutual fund is an investment company registered in the Securities and Exchange Commission.
- The concept pools the money of different investors. A professional fund manager invests the funds in a diversified portfolio of financial instruments and securities.
2. Can I lose money in a mutual fund?
- Yes. Depending on uncontrollable market conditions. But, mutual funds use various strategies to minimize these risks or paper losses. Example: diversification, portfolio evaluation and regular rebalancing.
3. How much interest do I earn as an investor?
- Unlike traditional bank products, mutual funds do not give fixed-returns. Returns are based on the difference between your buying price and the current Net Asset Value Per Share. Market conditions play a major role in determining the annual returns of mutual funds.
4. What happens if the fund manager performs poorly or goes bankrupt?
- Technically, the investors simply need to vote for and appoint a new fund manager. But, even if this happens the assets of the mutual funds will remain intact because the underlying instruments of mutual funds are all marketable securities.
5. What prevents the fund manager from running away with investors’ money?
- Mutual funds are structured in a manner that protects the interest of its shareholders. The fund manager does not have any control over the physical assets of a mutual fund except to make buying and selling decisions. The mutual fund assets are held by a custodian bank, appointed by the shareholders during annual shareholders meeting. Aside from these, by law mutual funds should also appoint a separate transfer agent to keep track all shareholder records as well a third party auditing firm to ensure check and balance.
6. What happens to my investment if I die?
- Mutual fund shares form part of your estate and will be distributed accordingly to your heirs (usually surviving spouse and children). It is recommended to assign a co-investor upon opening a mutual fund account to avoid complications in the future.
7. Can I dictate what instruments to buy or sell?
- No. The fund managers will follow the investment parameters indicated in the fund’s prospectus. Therefore he is the one who decides where to invest the mutual funds. He is backed-up by a research team who feeds him valuable information and market research to help come up with the best decision and once final transactions are being executed by seasoned “traders”.
8. What’s in it for the fund manager?
- Fund management companies earn through “management fees”. These fees are amortized daily therefore have a minimal impact on the NAVPS. The amount varies but normally ranges from 1.5% to 3% of the total assets per year. Note that the NAVPS that are published are already net of these fees.
9. Are mutual fund gains taxable?
- No. Mutual fund gains are exempted from the 20% withholding tax based on the Comprehensive Tax Reform Program (CTRP) of 1997. This was done to promote long-term savings in the country.
10. Aside from Management fees, are there other “hidden charges” in mutual funds?
- All Mutual funds have sales load schedules. These are discussed and indicated in the funds’ brochures and prospectuses, therefore are not “hidden charges”. Entry fees are charged outrightly upon acquisition of mutual fund shares while exit fees apply only when a shareholder did not stay with the mutual fund for the recommended term. For entry fees, the amount varies but normally ranges from .25% to 5% of the investment amount and for exit fees from .50%-1.50%.
11. How long is the holding period?
- Mutual funds are very liquid investments therefore technically do not follow “strict” holding periods. These means that shareholders can actually sell their mutual fund shares in any banking day. However, based on experience and having a better understanding of the behavior of the market, fund managers provide suggestions or recommendations as to how long it will be wise to stay invested in order for shareholders to avoid risks at the same time maximize returns.
12. Where will the money be invested?
- Mutual funds are invested in baskets of securities that vary depending on the type of mutual fund. Hence if you choose an Equity fund, this is invested mainly in listed stocks, often blue chip companies (90% maximum). A Bond or Fixed-Income fund, in contrast, invests exclusively on interest-bearing instruments. A mutual fund’s investment universe, including restrictions and risks, can be found in the fund’s prospectus. Mutual funds cater to all types of investors: conservative, moderate and aggressive.
13. What are the typical requirements?
- Photocopy of 2 government-issued IDs, Tax Identification Number, Social Security Services Number, 2 Signature Cards, Investment Application Form and Account Opening Form.
14. Are foreigners or minors allowed to invest?
- Yes. Foreigners are allowed to invest. For minors, they need to have a co-investor who is of legal age to act as their “guardian”.
15. What are the payment options?
- Cash or check (payable to the name of the mutual fund of choice) or direct deposit to the mutual fund’s specific bank account (attach original deposit slip to the investment application form).
16. Are there cut-offs?
- Yes. On or before 12:00 noon in order to credit your investment the same banking day. Otherwise, considered booked the following banking day.
17. What is the proof of investment?
- Upon submitting your investment, a Provisional receipt will be issued. Within 15 banking days, a Confirmation Notice or Receipt will be sent to your mailing address.
18. How do we get updates?
- A statement of account will be sent every quarter to give you a status of your investment.
19. How to redeem?
- Redemption is as easy as investing. You simply have to accomplish a Redemption Request Form and a Stock Assignment Form, surrender your Confirmation Notice or Receipt and wait for it to be processed not more than 7 banking days.
Source: RSA
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