In the previous article of this series on the Fundamentals of Mutual Funds, you’ve learned about the three biggest asset classes which make up a typical managed mutual fund.
Again, the three asset classes are:
- Cash and Cash Equivalents — Treasury Bills, Short-term Commercial Papers, Money Market Instruments, Time Deposit, etc
- Bonds — Debt instruments issued by the Government and corporate enterprises, which normally have longer term maturities of more than one year.
- Stocks or Equities — represent ownership stake in a corporation.
“Securities” is a board term which refers to the aforementioned investment classes. Cash, Cash Equivalents and Bonds are often labelled as Fixed-Income Investments, because each offers a predictable return (coupons, interests). On the other hand, Stocks are often labelled as Equities Investments. You will come across these terms from time to time so make it a point that you remember them.
In the Philippines and anywhere else in the world, Managed Mutual Funds would try to mix-and-match these types of investment instruments to try to meet their respective investment objectives.
Mutual Fund Investment Objectives
One of the good features of Mutual Fund as an investment tool is its Investment Objective which can be categorized this manner:
1. Safety — This is also known as Capital Preservation or Principal Protection. The strategy involves keeping your money invested in securities that are low risk such as Time Deposits, Treasury Bills (from 91 days to 364 days maturity), etc. The fund manager’s job is to keep your investment money from eroding its value overtime. That is, if you have 1 million in total investment, you can be sure that it will NOT be less than 1 million face amount 1 or 2 years later from now.
2. Income — This means having a steady stream and somewhat predictable income coming your way. This is like saying letting your money earn more money. The fund manager’s strategy might include investing your money in high-grade bonds and other dividend-paying securities.
3. Growth – Funds seeking growth would put majority of their investments in stocks, which historically outperformed all other types of investments over a long period of time. Capital Appreciation is main goal of Growth Funds.
There are some mutual funds whose investment objective includes a combination of those three. Some terms you may come across in your search for a mutual fund are the following:
- Growth-Income Funds
- Aggressive Growth Funds
- Balanced Funds
As an investor, it is important that you take a look at the Fund’s Investment Objective by reading its prospectus and make sure that it matches with your own Investment Goal and your Risk Profile.
Your Risk Profile : What kind of investor are you?
When you invest in a mutual fund for the first time, your Mutual Fund Advisor, will hand you a set of questionnaires to help you determine your Risk Profile or Risk Appetite.
You’ll soon discover that you belong to these broad categories:
1. Conservative — You are a risk avoider. You want safety more than anything else. You will be more comfortable with a fund whose investment objective is Safety of Principal.
( FAMI Save and Learn Fixed-Income Fund consists mostly of Corporate Bonds, Philippines Government Securities, Preferred Stocks, and other Money Market Instruments are perfect for conservative investors who aims for Capital Preservation first and foremost. )
2. Moderate — You are both risk avoider and a risk taker. Most investors would like to “think” they belong to this group. You will feel comfortable if your money is invested in Income Funds.
( FAMI Save and Learn Balanced Fund, which consists of 70% Stocks and 30% Fixed-Incomes Securities, is best for investors with moderate risk profiles. )
3. Aggressive — You are a risk taker and you are adventurous also. You have probably seated at a poker table for fun and profit. You are a natural fit for Growth Funds which, consists mostly of stocks.
( FAMI Save and Learn Equity Fund is recommended for investors with moderate to aggressive appetite for risk. )
Like Mutual Funds, some investors don’t naturally fit in just one category. Some investors can be found at the two extremes of the Risk Spectrum — ultra-conservative and hyper-aggressive — and in between are even more investors whose risk appetites come in various flavors.
The only person who really knows who you are is the one you see when you are face to face with the mirror.
Whatever type of investor you are, it’s very important that you take an honest look at your risk appetite. Then find a mutual fund or two whose investment objectives are more suitable to your type.
You may have to factor in also your age, your investment capital and your time horizon in achieving your financial target.
More importantly, review your investment plans as time goes on. You should be committed to your Financial Plans, but they should not be etched in stones.
Times will change. The Philippine Economy can go down the tank. And Pinoys may not be eating Jollibee anymore… who knows?
So play around and remember to put the fun in Mutual Funds.