Things You Should Know Before Investing in Mutual Funds

The Management Fees

Mutual fund companies (if you have read the prospectus) will charge in between 1.5% - 5% per annum for the management fee. With the current inflation rate of 3.8%, that means your money losses its value by 5.3% - 8.8% every year. So you will need to beat the benchmark by a lot in order for your money to fully work. 1.5% - 5% might not look like a lot. But if you plan to invest in the long term and saved up to P1M, that means you're giving away P80,000 per year to those managers. Who might not be even working (more on this to 2nd point)...  I personally, think that 5% is very expensive.. And to think that I have no control of my own money.

95% of Mutual Fund Managers Can't Beat The Index

The index, is the benchmark, the Philippine Composite Index. This is where all funds are compared on, to know if they did well or not. And most fund managers can't beat the index. 95% of them. So what's the reason for investing in mutual funds then? If I can buy the index itself and beat 95% of all the mutual fund managers. Best of all, I don't charge myself with 5.5% management fee every year.

So you might be thinking, "5% is good enough compensation for people who does all the work, researching companies and managing the money." Well, yeah... That is true. 5% is in fact very modest if it involves a lot of work. However, on to #3...

Copying the Index is FREE

So you want to beat 95% of all mutual fund managers. But then you don't have the knowledge like they have in choosing stocks, so you went ahead and gave them your money. The thing is, most managers are aware of the fact that they can't beat the index. So, they buy the index. But still, you get mediocre returns because you will never beat the index once the management fees took effect.

Now, you say that is a lot of work to create a portfolio that would mimic the index? How hard is googling "Philippine Composite Index"? You'll get a list of companies that's included in the index for free. All you need to to is buy all these companies and you have yourself an index fund. Without the hassle, without the management fees.

So if you think you can pick stocks better than an index, you should invest for full time. Until then, I would prefer to stay away from mutual funds. Especially if the reason to learning investing is to earn money, you only beat the purpose of the exercise, making other people handle your money.