Expert advice on buying Mutual Funds (Part 1 of 2)

Efren Cruz, author of "Pwede Na! The Complete Pinoy Guide to Personal Finance," and Chairman and President of the Personal Finance Advisers Philippines Corporation, lays down the basics on the different types of mutual funds and shares tips for would-be buyers:

A mutual fund is simply a corporation where people with similar investment objectives pool their funds. The funds are then managed by a separate corporation called the asset management company.

In the Philippines, mutual funds are categorized by the type of investments they get into, such as:

Equity funds - funds that invest largely in stocks; earnings of the fund can fluctuate wildly. In the long run, however, returns on equity funds have been superior to mere fixed income funds. This fund is not for the faint-hearted.

Index funds - a variation of the equity funds, these funds invest their money among several stocks in the same proportion as with the index that the funds track. For instance, a Composite Index stock would buy stocks in the same proportion as they are allocated in the Philippine composite index. These funds have slightly less risk than equity funds.

Balanced funds - funds are invested in a balanced portfolio of stocks and fixed income securities. These funds go for both the earning power of stocks and the relatively stable income stream of fixed income instruments. Investors with medium risk appetite are compatible with balanced funds.

Bond funds - funds that invest in long-term fixed income instruments. Earnings do not fluctuate as much as the other funds above. Bond funds are for people with low risk preference.

Money Market funds - funds that investment in fixed income instruments that are no longer than one year in term. These funds are for investors who want the minimal risk to their portfolios.

In buying mutual funds, you sometimes have to pay entry fees called sales fees/load. If you sell your mutual fund earlier than a specified time, a mutual fund may also deduct from the proceeds of your sale an exit fee called a redemption fee/back end load.

To realize earnings on a mutual fund, you just compare the current net asset value per share (NAVPS) of the fund with the fund's NAVPS at the time you bought it. NAVPS is the daily price of the fund that is published daily in newspapers and posted on web sites. (i.e. ICAP, Businessworld, INQ7Money). If you want to compute for the effective earnings though, you should include the cost of sales and redemption fees, if any.

Just a few tips in buying mutual funds:

1. match a fund's investment objective and risk parameters with yours

2. compare entry (sales) and exit (redemption) fees. Some funds, for example, do not charge redemption fees after a one year holding period

3. look at the investment track record of the fund and/or the fund managers

4. look at the strength, credibility and stability of the institution sponsoring the mutual fund, including the reputation of the board of directors in the fund

5. assess the importance the fund gives to client servicing such as investor feedback & freebies

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