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How to lose and not lose money in mutual funds


Is mutual funds risky? Yes it is. 
Can you lose money in mutual funds? Yes you can.
Can you also gain big time? Absolutely.
Can you then manage or minimize the risk? Ofcourse, you can! 

The answer to all these questions is basically financial education. Being financially educated does not only mean having investments or financial products. But by knowing when, how, and why you invest, at the same time understanding how to manage or minimize the risks involve. 

After understanding about mutual funds: What is a mutual fund?
Understanding its advantages: 9 advantages of mutual funds.
And why it is important to invest in mutual funds: In-depth understanding of mutual funds

Today, let us learn how to manage and minimize the risks involved in investing in mutual funds.

Anything in life, there will always be risks. Example: driving is very risky. You hear a lot of car accidents causing property damages or even death. But it does not mean that everybody should avoid or stop driving. We just need to "learn" and "apply" basic guidelines and strategies to keep us safe. Same with investing in mutual funds. 

Here are few examples how to lose money and more importantly how not to lose money in mutual funds:

1. How to lose money: Thinking short-term. 

We jump into investments because we see the potential returns. However, when the market goes down, a lot of investors panic. So instead of investing in the long-term they withdraw their funds too soon. 
Losing money in mutual funds by withdrawing too soon
Losing money in mutual funds by withdrawing too soon (source: Philam Asset Management, Inc.)
Taking Philam Strategic Growth Fund as an example, looking at the graph above, the person invested last April 10, 2015 and withdrew his money on July 1, 2016. 
Percent loss from 595.58 to 561.37 NAVPS = 5.74%
Assuming he invested 100,000
His 100,000 becomes: 94,256
Minus early redemption fee of 1 year to less than 2 years: 0.5% 
Actual Value: 93,784!

Therefore, how to not lose: Invest for the long-term

2. How to lose money: Thinking long-term but no additional investment. 

Another way to lose money is by not actually gaining it. Thinking long-term is good, but if we don't do additional investments, then we lose the potential returns of actually adding more in our investments. 
Philam Strategic Growth Fund 10 year performance
Philam Strategic Growth Fund 10 year performance (source: Philam Asset Management, Inc.) 
Looking at the graph above, the person invested last July 3, 2006 and withdrew his money on July 1, 2016. 

Assuming he only invested the initial opening amount of P20,000 and no additional investments after. Then:
Percent growth from 168.62 to 561.37 NAVPS: 232.92%
Total Value: 66,584!

Not bad. But only if he invested more, he could have gained more. What if he invested 500,000 then today it would have been 1,664,600!

Therefore, how to not lose: Invest MORE for the long-term

3. How to lose money: One-time, BIG time. 

So to gain more is by investing more, then why not invest one-time, but BIG time. As seen in the previous example, investing 500,000 and turning it to 1,664,600 can be very amazing. But, there is also a risk in investing in one-time, big time. 
Losing in mutual funds by one-time, big time strategy
Losing in mutual funds by one-time, big time strategy
Looking at the graph, the investor invested last May 16,2013 and withdrew on May 16,2016. Three years can be a long-time for some investors. But because of the stagnant performance of the market, the investor can be easily tempted to withdrew his funds. 

So assuming he invested: 10M
Percent loss from 608.85 to 542.03 NAVPS: 10.97%
Thus total value: P8,902,521

That is a BIG time loss even if the investor invested for 3 years which can be long-term for some. 

Therefore, how to not lose: Invest CONSTANTLY regardless of the market situation and for the long-term. This strategy is also known as Money Cost Averaging. 

Learn more about the money cost averaging strategy to our next blog post. 

You see, in investing there will always be risks involved. But to manage and minimize the risks, just like driving, we need to "learn" and "apply" the strategies in investing. 

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