Every person, young or old, rich or poor, book smart or street smart, even for those not so smart should know what mutual funds and UITFs are and how they work.
Because once you know about Mutual Funds and UITFs, these are basic investment tools for becoming wealthy. Think of a carpenter What are the basic tools of the carpenter? Their saw, nails and hammer, and possibly their ruler and pencil.
You should look at mutual funds and UITFs in the same way. If you want to become wealthy, you need to understand these very basic investment instruments called the Mutual Fund and UITFs.
To become wealthy, you need to understand investments like a carpenter understands his tools
What are Mutual Funds and UITFs?
Mutual Funds and UITFs are a kind of investment where money is pooled from investors, entrusted to a professional fund manager, then invested in a specific asset class.
Okay, that was a long definition, so let’s break it down into 3 parts.
First – It is a kind of investment where money is pooled from investors.
Second – The money is entrusted to a professional fund manager.
The fund manager is professionally trained to know about investments, and where to best invest your money in.
Then third – The money is invested in a specific asset class.
Asset class just means, here the different investment options. So you can invest in stock market, bonds, or short term deposits, or real estate, and so on and so forth.
Now how does this work? Let’s go into an example.
Let’s say we have You. Myself. And another 100 people who want to invest. Now when we invest. The money is pooled together.
This pooled money is going to be given to a professional fund manager. Again this is a person who is an expert, a person who has the experience of investing. And the fund manager will be making the investment decisions like what specific company or asset to invest the money in.
Now where will the money be invested in? The money could be invested in stocks, bonds, or even real estate. IT would depend on what kind of fund you get. Because there are different kinds of mutual funds and UITFs.
So how do you earn money?
An important thing to know about mutual funds and UITFs is that your earnings are NOT guaranteed. And the value of your investments will go up and down and up and down over time. But over the years, you can expect it to go up.
For example, here is a chart of just one of the values of a mutual fund over the past 10 years from Jan 2006 to December 2015.
As you can see it goes up and down, up and down, up and down through the years. But over the long run, it goes up.
Now, when people see a chart like this, two questions come to mind.
First is – what makes it go up and down?
The simple answer there is economic forces. Investors going in the Philippines, going out. Businesses earning money, government regulations, world events, recessions, basically anything that affects the economy. This is the reason why the exact value of your investment cannot be guaranteed. That’s why it goes up and down, because of so many different factors.
This is the primary advantage of investing via a mutual fund or a UITF – because you don’t need to understand these economic trends in depth. Your fund manager understands these things, and makes the investment decisions already to grow the money.The fund manager will try to make money for you. But again, the fund manager cannot guarantee exactly how much you will earn. But you can trust your fund manager, that they will want your money to earn.
The second question people is ask is… So how do you exactly earn money?
To know how much you have earned, will depend on what’s called the NAVPS and NAVPU.
NAVPS means Net Asset Value Per Share / and NAVPU means Net Asset Value Per Unit. Whether its per share or per unit. They mean the same thing. Now the NAVPS is just an arbitrary number that was established at the beginning of the fund. It could be 1 Peso per share, it could be 10 pesos per share, it could be 300 pesos per share. The NAVPS goes up and down over time. The only thing that matters is the NAVPS of the fund when you buy it and when you sell it.
Are mutual funds and UITFs good investments?
The answer is YES! Especially for beginners because it’s the fund manager that makes the investment decisions for you. All you have to do is, buy the fund. Wait and be patient for the NAVPs to go up. And sell when you’re happy with the profits. That’s it! Of course there are many more things to learn about the different kinds of mutual funds and UITFs, and how to pick the right kind of fund according to your goals. Again, we’ll talk about that in a later episode.
For now, we hope you’ve understood how mutual funds work, how you make money, and know that mutual funds and UITFs are one of the simplest and basic investments you need in order to reach your financial goals.
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Hi Appium, welcome, and I enjoyed you article! I am also new to the platform and going to be covering tax and finance. I will follow you and interested to read more of your work in the future.
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