Choosing the right mutual fund for you

Among the easiest and most affordable ways to begin one’s journey towards financial wellness is through mutual funds. As an investment vehicle well-suited to a variety of goals and conditions, mutual funds are designed to give Filipinos immense flexibility with how to manage their wealth.

But this also means that for a new investor, there is an overwhelming number of mutual funds to choose from. How do you know which one is right for you and your goals?

Know your goals and your risk tolerance

The very first step is to look inward and ask yourself: why you want to invest, and how much risk are you willing to take with your money. Before investing in any fund, financial institutions typically provide you with a short risk assessment test to identify your goals and risk profile, which they can then use to recommend the best investment funds to suit your needs.

Essentially, the tests boil down to simple questions. Do you want to invest for long-term gains, or do you want an investment that gives you quick returns? Are you saving the money for future goals, such as retirement, or to simply have a place to put your money without losing out to inflation?

More importantly, can you accept huge, short-term losses in pursuit of higher long-term gains? Or, are you more conservative and want your investment to remain relatively intact? High returns come with high risks, so you must decide where you are most comfortable.

Finally, how long are you planning to keep your investment? Do you expect to need the returns in a few months or in several years? Typically, investing in the long term (around five years) is ideal, as mutual funds have fees that can take a chunk out of your returns if sold too early.

Understand the different fund types

With your goals and risk profile in mind, you can now choose what type of fund is best for you.

If you plan to invest for long-term gains and can handle a fair amount of risk, a long-term capital appreciation fund or an index-based fund could be an ideal choice as these funds typically hold a high percentage of their assets in common stocks. That said, these funds can be risky in nature, as the stock market is vulnerable to fluctuations and volatile global market conditions, but they also provide the highest returns, as long as the fund is held for a time horizon of more than five years.

If you want a fund that can give you current income through dividends, you may want to choose an income fund. This fund is usually comprised of bonds and other debt instruments that pay interest regularly. As such, this fund has significantly less volatility. You may also further narrow down your choice depending on what type of categories of bonds you wish to have, and by different time horizons.

In between these two options are balanced funds, which are designed for investors who have a long-term time horizon but are unwilling or unable to assume the substantial risk. A balanced fund invested in both stocks and bonds could be the perfect middle-ground. — Bjorn Biel M. Beltran