How to Choose The Best Mutual Fund or UITF For You
Mutual Funds and UITFs are one the easiest investments we can make. Even with limited knowledge or funds, we can begin to take advantage of a bull-run in the stock market, invest in government bonds or invest in the highest-yielding time deposits.
This probably goes without saying. For Mutual Funds, you can check the Philippine Investment Funds Association. For UITFs, since they are bank products, do business only with banks that you trust.
The rest of the factors below can be found on the fund’s prospectus or latest performance report.
2. Historical Performance
Look for terms like Annualized Performance, Calendar Year Performance and Annualized Return. The rule of thumb is: the higher the better.
Example: an Annualized Performance of 11% means it can get this much return in a year.
Now, this doesn’t guarantee future performance, but it can show how competent the fund managers are and what can be reasonably expected. There’s no use waiting to see if they can get you a 15% return in a year (for equity funds) if they’ve never done so before.
Note: For equity funds, if they rarely or never come close to surpassing or even matching the PSE Index, it might be a sign to look for a different fund.
Look for terms like Sales Load, Administrative fees, Advisory fees, or Management fees. The rule of thumb is: the lower the better.
High-performing funds might charge more, so it’s not just about choosing from the funds with the lowest fees. It’s best to weigh this along with historical performance. The goal is to compute how much those returns really are after the fees are subtracted. (Some funds may have factored in the fees already, but it’s best to ask unless they explicitly stated otherwise.)
Look for terms like Minimum Initial Investment and Minimum Transaction. The rule of thumb is: The lower the better.
Minimum initial investment is the money to avail of or participate in the fund. Minimum Transaction is the money you can place (or “deposit”) for each succeeding transaction.
It’s important to make sure you can afford both, so you can invest regularly.
It’s better to deposit 1000 per month rather than invest 5,000 every five months. That way you can invest regularly and make the small amount grow now, rather than wait for a long period of time while the money waits in a savings account.
Look for terms like Early Redemption Fee and Holding Period. Rule of thumb: Just make sure not to withdraw earlier than prescribed.
There’s a penalty for withdrawing your money too early. Holding Period is how long you have to wait before taking back your money. Early Redemption fee is how much you have to pay as penalty, if you don’t wait the prescribed amount of time.
– Holding Period: 180 Calendar days
– Early Redemption Fee: 1.00%
– If you withdraw on day 179, your 10,000 initial investment will become just 9900 (if it grew 0%).
6. Accesibility (hat tip to Startup Mom for pointing this out)
How easy it is to invest and re-invest in the fund? Is it near your place of work (since that’s where you typically are during the day)? Can you do it online? Can you pay through bank transactions or other secure money transfers?
The less hassle, the better. Although you shouldn’t let people get in the way of bettering your financial future, it’s still easier to do so if all you have to contend with is yourself.
So what the most important factor (aside from a legitimacy of the fund)? My suggested order of importance is:
1. Volatility. Surprised? You shouldn’t be. There are different kinds of investors and investment objectives. But this doesn’t mean the least volatile equity fund is the best. Instead choose among the 4 basic types: equity, balanced, bonds, and money market.
2. Historical Performance and Fees. But just barely. It’s almost a tie with the third, but since growing money is the main objective, this is more important.
3. Affordability. Investing is more of a long-term, regular habit. If you have to wait 5 or 6 months to invest, you’re waiting 5 to 6 months before your money grows. But with affordable initial investment and minimum transaction amounts, you can start growing your money right away.
4. Accessibility. At first look, this shouldn’t matter much. After all, the money
should sit in the fund for some time, so there’s no need to keep going
back to the bank or fund company. But then most employees tend to be
busy in their work, and even single people can have very hectic personal
lives. So it’s important to think of this pragmatically: You could gain
several percentage points more per year, but if the trade-off is you
can’t regularly invest each payday (or whenever your schedule is), it
might not be that profitable in the long run since the additional funds
you place yourself are a big part of the early gains you get.
5. Penalty. If there were other factors to consider, this would be even further down the list. It’s important to remember not to invest in anything that does not fit your investment objective or risk appetite. If you follow that, there would be no need to withdraw early (that’s what an emergency fund is for).
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This article is part of a series:
- Investing in Mutual Funds and UITFs
- How to Choose The Best Mutual Fund or UITF For You
- Find And Compare The Best UITFs In The Philippines
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