New to mutual fund, UITF, stock investing? Read this.

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So you’ve heard about investing into mutual funds and UITF. You probably have friends or family members into it already, and you’re wondering if it’s right for you. Maybe you’re even close to opening an account, so you too can start earning passive income even when you still have questions about it or whether this is a good decision for you at this point in your life.

Before you even do anything, read this first guide for beginners into mutual fund and investing in general.

1. Invest in yourself first.

Is this your very time to start an investment fund? Then there’s something that you need to know. Invest in yourself first. Why? Because you are your biggest asset and just like any asset if you don’t do anything about it, it’s not going to help you improve your life or earn anything extra.

Investing in yourself first means learning about the investment opportunities like the back of your hand before making any decision. But if you’re really serious in maximizing your investment, you should understand personal finance.

You can start by reading books on financial planning. There are many available in your local and online bookstore.

Of course, you can read up on many blogs just like PESOLAB. They’re great resource from people who have already started way ahead and decide to share what they’ve learned online for everyone.

The government through the Bangko Sentral ng Pilipinas (BSP) is also encouraging the public to learn more about the many opportunities for investing and be more financially literate. And that’s why there are now many companies that are offering free financial seminars. You can find these seminars from the Facebook pages of the companies. Check if there’s one near you.

But I’ve actually learn a lot from dropping by a mutual fund and a bank near my place of work. I asked for a rep who’s responsible for investing, and they’re able to assist me. Hopefully, you can find the time to drop by any banks, mutual funds, trust entities, or stock brokerage companies and be able to talk to someone. Usually, they’d give you a bit of an overview of their funds and let you go through an suitability assessment to check your liquidity requirements, time horizon, risk profile, and other factors.

One of the things that can really make the process easier for anyone who’s new into investing is to have someone, a friend or family member, show you ropes. By learning from someone you trust, they can give you tips, show you their practices, recommend books, and provide suggestions on your continuing financial literacy.

One advantage of learning first about financial planning in general is that you can protect yourself from scams. One, you’re no longer impressionable when people make you any offers, as you already know legitimate alternative options like mutual funds, UITFs, PERA, variable universal life insurance plans, or savings programs offered by government agencies like Pag-ibig MP2, SSS Flexi Fund, SSS PESO Fund, or even the more conservative high-yield savings account, time deposit, bonds, or long term negotiable certificate of deposit.

Two, you’d be critical of anyone who’d be offering you scams, especially those that promise very high return on investment without a clear business model that can justify such pay-out. Most Pinoys fall prey to the scams because of “next shiny object” syndrome (where they’re easily convinced of an enterprise that sounds too good to be true) and fear of missing out (FOMO, the idea that you should join because everyone else is on it).

2. Know your financial status

The second step is really to think of your current financial status. Investing requires that you understand your habit around managing your own money and awareness of how you earn and spend money. How much are you making? What part of your income goes to savings?

Whatever you do in the present is going to affect your future. Your earning capacity and spending habits are going to shape your life down the road. So it pays to be aware of them right now so you can do something about it. Planning, as they say, is changing your present in order to create your future. Hence, you can do two things:

  • Determine your net worth. Keep a list of your assets and debts, and check if the difference between the two comes out to a positive. The goal is to increase your assets over time and minimize debts.
  • Make a cash flow analysis. Take a look at the income that you’re earning versus all your expenditures.
  • Dream big. Write down your financial goals. These could be in the form of assets that you want to acquire (cash, real estate, stocks, bonds, etc.) Your goal must be something that happens at a future date with an amount.

3. Improve cash flow

Once you know your present financial health and your big goals in life, it is most often than there is going to be a disparity between the two. How to bridge the gap is your next step. Develop a plan to be able to set aside more out of your income and spend into a strategy to building your financial foundation (more of this in the later section), and to invest for your future personal goals.

  • Try to look see how you can save more by focusing your spending on needs rather than wants.
  • Increase your income stream by working successfully in your career to be promoted, creating side hustle, doing part-time job, etc.
  • Lessen your debts by paying them. Or you can also maximize your credit by using the money judiciously to start a business, learn a new skill, etc.

4. Build your financial foundation

The more that you invest in yourself, the more that you’d realize that all investments come with risks, and one of the many ways to minimize the risks is to build your financial foundation. Imagine this: all your money is in an equities index fund of a mutual fund company, but then you got sick. You’d be forced to redeem your money even at a loss (when the stock market is down) because you need it.

It’s really important to make sure that you get all the bases covered. Get insured. You need to protect the capital you’ve put up that let you earn you extra income. Building a strong financial foundation is one of the things you’re going to learn in financial planning.

  • Emergency fund. An emergency fund is recommended, and it should be equal to at least 3 to 6 times your monthly income. It is going to be useful when you meet unexpected life events like losing your job or sickness.
  • Make sure that you have complete contribution to your Philhealth membership.
  • HMO or health maintenance organization is a private company that takes care of hospital bills in tandem with Philhealth. Check if you can get an HMO plan for you and your family through your employer or buy a plan. Hospitalization is not cheap and considering that it is an emergency, where you’d need to pay immediately for confinement, it is a must.
  • Life insurance is another safety net that also forms part of the a solid financial foundation. In case of unforeseen situations like untimely death, accident, or hospitalization, the benefits of the policy and insurance riders are going to cover the costs and can even help your family recover financially long after you’re gone.

5. Invest only in what suits your needs, what you understand and at the least cost

Investment funds are not created equal. There are so many options available for you may be a bit confusing at first. But it only also means that you can choose the one that best suits your situation. And if there is one guideline that you should follow, it is this simple maxim: invest only in what you understand at the least cost.

The one common mistake for beginners is that they invest for the sake of investing. When you do this, it’s easy for you to lose momentum especially when there are challenges that life throws your way such as unexpected expense, emergency, etc. So what can you do?

  • Make sure that you tie your investment with a financial goal as discussed above. It can be anything like buying a house or vehicle, or preparing for a wedding or a travel abroad. By matching your investment with a goal, it provides the reason to do the things that you have to do to make room for investing such as sticking to a budget, increasing income stream, etc.
  • Invest only according to your time table. Does your goal need to be achieved immediately or in five years?
  • Pick only the fund that you suits your investor profile. Each of us are different. Some of us are aggressive and comfortable with risks. Others want to avoid them. Make sure that you get to choose a fund that suits your risk appetite.

Invest only in what you understand

It is important to only invest in things that you understand. The more that you have questions about an investment, the more reasons to stay away from it. Should you put up your money, make sure that you really know how it’s going to give you income.

  • Is the investment legally recognized and authorized by the government? It isn’t enough to have an SEC registration. All corporations are required to get one after all. What investment companies must need to acquire is the secondary license that allows them to offer securities to the investing public.
  • How does the investment earn? You need to know what business the company is into and whether their operations can sustain the forecast earnings or any earnings that they promise.
  • What is the benchmark for return on investment? A benchmark is the range of returns that can be expected. For instance, a savings account interest starts at 0.25% annually, time deposit interest ranges between 1% to 4%, bonds are between 3% to 7%, for Pag-ibig MP2 it’s 4% to 8% , index funds can vary widely between negative return for one year to about 10% for the past 10 years. Any return that is higher than these should make you nervous. If it’s too good to be true, then that’s because it is.

At the least cost

Another thing that you need to consider would be the charges, fees, and taxes. That’s because these fees would actually drag your potential income whether you’re investing short- or long-term. The lesser these extra costs are, the higher would be your return.

You can actually visit this link of mutual company fees, then this link as well for UITF fees, and then lastly this link for PERA fees. Another great article is this link where it tells you how to avoid paying the sales load for mutual funds.

You may also read this comparison of index funds that actually check into the impact of fees on future ROI.

And lastly, when you’re choosing the investment, make sure that it is really something that you can do. Some investments like buying stocks may require time and skill on top of the required capital. Others would have a fund manager who does everything on your behalf. So understand exactly the level of commitment that is required; if you don’t have the skill and the time, then may be pure passive income such as long-term mutual fund investing is something that might suitable you.

Other considerations

What this all means is that you have to shop around. Get information. Drop by investment companies, banks, trust entities, and other such duly-authorized institutions to get to know more about their products. And then decide from there and again, choose only what you think would fit you the best.

Other considerations that you might want to include would be: customer service, ease of doing business, convenience, location, online access where you can manage your account or monitor your portfolio, all-in-one shop (banks for example can offer stock brokerage, mutual funds, UITF, PERA on top of their services), etc.

Get started

Finally, take action. Sitting on the fence because you’d like to be as informed as possible is okay, but you need to make sure as well that at the end of your research, you get started. Avoid the analysis paralysis.