In lay man's term the Index Fund is a mutual fund that is run virtually on autopilot. Generally stockbrokers don't recommend index funds because no commissions can be derived for them. For the first-time investors, investing a small amount of their portfolio in an index fund is a very good start.
I will focus on one index fund offered by the Bank of the Philippine Islands (BPI) and will tackle it without the complicated finance terms for the majority of the blog readers to understand.
First, Why an Index Fund?. The primary benefits of investing in a mutual fund is that our gains are exempted from taxes based on the Comprehensive Tax Reform Program (CTRP). This was done to promote long-term savings in the country. Secondarily, over the long term index funds have outperformed other mutual funds because they charge low fees. The BPI Fund managers charged 0.75% per annum for the management and distribution fees while others charged 1.75%. In terms of sales load, the BPI Index Fund charged 1.5% while other mutual funds charged 2% this will result on more shares for you if you choose an Index Fund.
Second, What are the Risks of an Index Fund?Mutual Funds are registered with the SEC and they are neither insured with the PDIC nor any other agency of the government, nor guaranteed by the Fund Manager. Before investing investors are expected to understand that the Fund is not a bank deposit product and any income, or loss, shall be for the account of the investor. Investors are advised to read the Prospectus of the Fund before investing.
Third, How much do I need to Invest in an Index Fund?. The minimum investment is P5,000 if you avail of the BPI regular subscriptiion plan (RSP). The plan require you to invest minimum of P1,000 additional investment per month deducted from your BPI savings account. If you will not avail of the RSP your minimum initial investment is P10,000 and additional investment is your prerogative.
Fourth, How will I earn money in an index fund?. If the present Net Asset Value (NAV) is higher than your buying NAV you will earn money. Historically, the BPI Index Fund is earning money.
Fifth, How will I redeem or encash my investment? Submit to your BPI bank your Purchase Order starting 9:00 a.m. to 2:30 p.m.. You will be paid in full via a Debit Authority you indicated in your application Settlement Account you signed on the date of your application..