INVESTING IN MUTUAL FUNDS
How do you create wealth? They say that the secrets to wealth creation and financial freedom remain just that – secret. Only the filthy rich have unlocked the formula to the path of financial success.
What do billionaires like Henry Sy, John Gokongwei, Lucio Tan, Jaime Zobel De Ayala and Manny Villar have in common? For one, they are all businessmen. Gone are the days when attaining a college degree, getting employed and working hard eight hours or more a day guarantees one’s future. Job security is already a thing of the past, and being employed and working hard to earn money, sadly, is not the ultimate key to becoming wealthy.
So what then is the key to success and wealth creation? Simple. Follow what the wealthy people are doing. They make their money work for them through their businesses and investments. Some would say, “But I don’t have the money, resources, time, and skill to do business like them. I am currently employed. Can I still be wealthy even if I am not an entrepreneur?”
The good news is YES! You can be wealthy, my friend. Many billionaires have become wealthy not only by doing businesses but they have amassed a fortune from their INVESTMENTS. These billionaires are not only businessmen but investors, too. That’s a fact that most of us are not aware of. They make their money work for them through their investments in stocks and mutual funds.
Now, let’s unlock one of the secrets to building wealth and financial security: MUTUAL FUNDS. If you don’t have the time to monitor stocks or study the stock market, you lack expertise, or you don’t have a huge amount of money to invest, and you want a relatively safe vehicle but with a great potential for your money to grow, then a mutual fund is a great option for you. When you invest in mutual funds, you are putting your money in the businesses of the billionaires. You let them run and manage their company while you work and earn a living for your family. Sounds interesting. All you need to do is set aside an amount from your salary and invest that to a mutual fund.
Investing in Mutual Funds is simple and easy. For easy reading and comprehension, I have breakdown the topics as follow:
- What is a Mutual Fund?
- Net Asset Value Per Share (NAVPS)
- Benefits of Investing in Mutual Funds
- Safety Features of Mutual Funds
- Risk and Return in Mutual Funds
- Earnings from Mutual Funds
- Classification of Mutual Funds
- How to invest in Mutual Funds
What is a Mutual Fund?
A Mutual Fund is an investment company that pools or collects money from many investors for the purpose of investing in various securities such as stocks, bonds, money market instruments and similar assets. Mutual funds allow ordinary people who have limited funds, insufficient knowledge of the stock market, and those who have no time to monitor their stocks to own shares of stocks of publicly-listed companies or to lend money to the government or corporations, for the purpose of earning a profit or maximizing return.
The law that governs Investment Companies or Mutual Fund Companies in the Philippines is the Investment Company Act (ICA). They are also regulated by the Securities and Exchange Commission (SEC).
What is Net Asset Value Per Share (NAVPS)?
Net Asset Value Per Share refers to the difference between assets (at current value) and liabilities, over the number of outstanding shares. NAVPS is computed on a daily basis. Check out NAVPS of all mutual fund companies in the Philippines by clicking the Mutual Fund icon below this website page. One way to earn in mutual funds is through Capital Appreciation which can be computed by getting the NAVPS difference from the time shares are bought and the NAVPS upon the time redemption.
How does a Mutual Fund differ from Direct Stock Investing?
Some investors prefer direct stock investing or individual stock picking. All they need to do is open an online account with a brokerage firm, set up a fund and buy stocks. They’ll be the one to place an order and do the buying and selling of stocks online. They also do the monitoring and timing of the market. Investing in individual stocks can provide greater returns, however, it poses more risks than investing in mutual funds.
Financial Experts are advising investors not to put all eggs in one basket which simply means not to put all your money in just one type of investment vehicle because that exposes you to a higher risk. Investing all your money in a single company could be highly profitable but it can also result in a 100% loss of your capital. It is therefore recommended that we diversify or spread our money into different investment vehicles to reduce risk or minimize losses. Direct Stock investing works best for investors who are risk-takers, those have sufficient knowledge of the stock market and have the time to monitor their stocks and the volatility of the market. Ask yourself, “Do I have sufficient knowledge of the stock market,?” “Do I know how to pick good stocks from the bad ones,?” “Do I have the time to study and monitor my stocks.?” If you answer “No” to all these questions then probably direct stock investing is not for you. Have at least an understanding of the fundamental and technical analysis of stocks before throwing in your towel to the world of direct stock investing. What about mutual funds? Read more and find out if mutual fund investing is deemed appropriate for you.
For beginners and for a conservative type of investor, a mutual fund investment is recommended since the fund is automatically diversified thus minimizing the risk of incurring losses. It also makes investing stress-free since there is a professional fund manager who will manage and allocate the fund for investors.
Unlike in direct stocks where you can invest in individual stocks one at a time, in mutual funds you are already investing in a collection of shares of stocks so that makes you a part owner of different companies already. For instance, if you are invested in a Mutual Fund that invests in Jollibee, PLDT, SM Investments, Ayala Land, Meralco, Universal Robina Corporation, GMA7, ABS CBN, Philippine Airlines, Cebu Pacific, BDO, BPI, etc. that makes you a partner of those companies mentioned. Feels good? It feels great! Why? It is because you are not just a consumer or customer of these companies but a shareholder for that matter! Investing in stocks or mutual funds is basically like buying a business. You become a part owner of not just one company but of multiple businesses.
To understand further, let us discuss the benefits of investing that can be derived from Mutual Funds.
What are the advantages of Mutual Funds?
First, investing in mutual funds makes your portfolio highly diversified. Since a Mutual Fund invests in different companies of different sectors and different asset classes, it reduces risks or losses in your investments.
Mutual Funds are managed by professional fund managers who have the competence, expertise and time to manage the fund. Together with the fund managers are research teams that strictly monitor the stocks locally and globally, 24/7 a day. If you don’t have the time to trade, or not an expert in stock investing, then a mutual fund manager will take the responsibility of managing your money for a fee.
One can already open a Mutual Fund account for only P 5,000. You may also put in additional investment for a minimum of P1,000. Investing every month is not mandatory so that also gives investors the flexibility in his budget.
One may invest any time and may also redeem (withdraw) anytime. Mutual Fund companies are mandated by law to pay the investors within seven (7) banking days from the time of redemption request and in some cases, they are able to do it in just a matter of two to three days through direct bank credits or check pick-up depending on the discretion of the investor.
Anyone can buy mutual fund shares directly from an Investment company or through a broker, agent, solicitor or bank. Investing can also be done through bank deposits, by mail, over a phone call, or online.
Mutual Fund Companies are highly regulated by the Securities and Exchange Commission (SEC). This gives investors the confidence to put in their money knowing that there is a government regulatory agency that will help protect the public interest.
Investing in mutual funds spare investors from the tedious research and study of the stock market, and the stress of constantly monitoring their stocks from time to time especially during any market downtrend. It also liberates investors from the emotions that go with investing such as fear and worries, and it enables investors to focus on what matters most to them or what their other priorities are.
What are the Safety Features of Mutual Funds?
Investing in Mutual Funds is investing our hard-earned money. Suffice to say, we should always think of how protected we are, as investors, and how safe our money is in this type of vehicle. To pacify us, here are some of the implementing rules adopted by SEC, and the mandates of the Investment Company Act that aim to protect the investing public like us:
Organization and Required Capitalization. Mutual Fund companies are organized in the form of a stock corporation. All members of the Board of Directors should be Filipino citizens. It should also have a minimum paid-in capital of P50 Million. This capital requirement provides the fund with greater purchasing power, liquidity, and resilience against economic crises.
Common Stock with voting rights only. All shares of stocks of Mutual Fund companies should be common and voting. This basically means that the shareholders have a voice on significant matters subject to their approval. In fact, on top of the organizational structures of investment companies are the shareholders who have the right to vote and elect the Board of Directors.
Waiver of Pre-emptive Right. The Articles of Incorporation shall include a provision on waiver of pre-emptive rights which means that shareholders need not worry about dilution of their ownership or proportionate interest in the fund.
Liquidity Requirement. The SEC requires that at least 10% of the fund should be invested in liquid or semi-liquid assets to ensure sufficient liquidity to cover possible redemption by investors.
Custodianship. ICA requires that all proceeds from the sale of investment companies shall be held in the custody of a duly authorized local commercial bank of a good repute or a company which is a member of a securities exchange.
Objectives subject to approval. The investment objective of an investment company can only be changed upon the approval of its shareholders, and any changes in the objectives must be duly stated in the fund’s prospectus.
Investment Limitation. It is not allowed to invest more than 10% of its net asset value in just a single company. For example, the maximum investment that it can make to Jollibee Corporation alone should not be more than 10% of the fund’s net asset value.
Unallowed Investments. An investment company is not allowed to invest in the following:
a. Margin purchase of securities
b. Commodity futures contracts
c. Precious Metals
d. Unlimited liability investments
Limit on Expenses. The total operating expenses of an investment company shall not exceed 10% of its total investment fund or net worth as shown in previous year’s audited financial statements. This is to discourage them from excessive expenses and fees.
Limit on Borrowings. Investment companies may borrow or incur debt provided that there is a 300% asset coverage for all borrowings. In case the company exceeds borrowings more than the 300% rule, it has 3 days within to bring the coverage back to 300%.
Redemption of Securities. Investment companies are required to compute the Net Asset Value Per Share (NAVPS) on a daily basis and it should be published in at least 2 newspapers of general circulation. In case of redemption, the fund is expected to pay the investor within 7 days from the date of the redemption request.
Investment Company Manager. Any person who acts as a manager or adviser of an investment company must register with the SEC and he must have a net worth of at least P10 Million.
Reportorial and Disclosure Requirements. Investment companies are required to submit monthly reports to the SEC indicating the following:
- number of shares sold and the total amount received from the sale of shares
- number of shares redeemed and the total amount of redemption
- number of shares outstanding at the beginning and end of the month
- percentage of the outstanding shares owned by Filipinos
Earnings from Mutual Funds
How do you earn from mutual funds? Earnings may be in the form of:
a. capital gain or capital appreciation
b. dividends (cash or stocks) earned on stock investments
c. interest earned on debt securities
Capital Gain refers to the gain on the sale of the securities.
Classification of Mutual Funds
a. Equity or Stock Fund. Investment is primarily in shares of stock and a little percentage are invested in fixed income securities. Equity funds can provide investors with a higher possible return but there is also a higher risk that you could lose money. The average historical rate of return of some of our equity funds in the Philippines over the past years is around 18%. If you an aggressive type of investor whose aim is capital appreciation, growth and with some income, and you are willing to take more risk then investing in equity fund is a better option for you.
If you are young, say, in your 20’s, investing in equities is a good option. You have longer time to let your money grow and you can tolerate the ups and downs of the market. But again, assess your risk tolerance, identify your objectives first and determine your time horizon to know if investing in equities is right for you. Better ask a financial planner to help you understand it better.
b. Balanced (or Hybrid) Fund.
These funds invest in a mix of stocks/equities and fixed-income securities, usually a balance between the two, and with considerations as to income, safety, and capital appreciation. Investing in a balanced fund is for investors who want a higher return but with minimal risk. the average historical rate of return of a balanced fund is around 12%.
c. Bond or Fixed-Income Fund.
These funds invest mostly in government bonds and corporate bonds that earn fixed interest and maturity, and a little percentage are invested in money market instruments like commercial papers. These funds are relatively safe but could only provide investors with minimal return, around 6% to 7% on the average. It is safe to invest in this type of mutual funds because you are basically lending your money either to the government or corporation with good credit standing. If you are an investor who wants a steady cash flow or if you are nearing your retirement with shorter time period to invest, these funds could work best for you.
d. Money Market Fund. These are short-term investments in fixed income securities such as treasury bills, commercial papers and certificates of deposit. These funds are generally safer, but with a lower potential return than the other type of mutual funds. For investors who have excess money and who would be needing the money in a short period of time like one year, then investing in money market is a better deal.
e. Index Fund. These funds simply track the performance of a specific index such as the PSE Index. When you invest in this type of fund, you are investing in a portfolio stocks that have almost the same weights and composition as that of the composite index of PSE. They tend to have lower costs, too than the other funds because fund managers simply track an index and need not have to make extensive research as compared to the equities and other funds.
There are other types but those mentioned above are the most popular ones. In fact, aside from peso investments, there are also dollar investments in equities, balanced, and bond funds. There are also exchange-traded funds, specialty funds, and global funds from which an investor can choose from.
How to Invest in Mutual Funds
The steps are easy. It is just like opening a savings account in a bank. According to the Philippine law, any person of legal age, or 18 years old and above may invest in mutual funds.
Mutual funds are distributed by authorized brokerage firms and brokers. If you have already found one where you’ll open an account with, that’s good. You may simply request forms from them and pay to them or online or through their affiliated banks. If you have none yet, I could recommend brokerage firms where I am currently transacting as far as my mutual fund investments are concerned. Check out Why I Invest in Mutual Funds through IMG. Plus, I’ll give you some tips how to minimize cost and save a lot. But before that, let us identify the requirements for opening a mutual fund account:
- Fill-out Investment Forms. Forms include an Investment Application Form (IAF), Investor Risk Profiling Questionnaire, Account Opening Form (AOF), and signature card.
- Attach a photocopy of 2 valid ID’s and don’t forget to affix 3 signatures on the copy.
- For joint account, 2 valid ID’s of your co-investor. For In Trust For or ITF account, a copy of Birth Certificate is necessary.
Important Reminder: As you fill out forms, make sure not to leave any blanks and supply all the necessary application. You should also have your Tax Identification Number (T.I.N.). For students, you may supply you parent’s T.I.N.
Payments may be made through checks, with the name of the mutual fund as the payee, or you may deposit to the accredited bank/s of said mutual fund, and mail the original forms, or better yet transact directly to the brokerage and pay thru the cashier and submit your documents personally.
Learned something? Pls free to ask questions or share your learnings.
About the Author
Divina Gracia M. Cabaddu, known to her students as “Ma’am Divine,” is a College Professor teaching Financial Management subjects such as Investment and Portfolio Management, Capital Market, Financial Analysis and Reporting, Strategic Financial Management, and Security Analysis. She started investing five years ago – both in direct stocks and mutual funds. As part of her advocacy, she is actively conducting financial literacy lectures to impart her knowledge on proper saving and investing. Her connections in Brokerage firms, Mutual Fund companies, and other financial institutions have enabled her to refer and help many people on how to invest and apply their learnings. Her mentors include Engr. Noel Arandilla, Registered Financial Planner (RFP) and founder of the Wealth Academy; Engr. Lyndon Malanog, financial coach of Bo Sanchez, Inc., and Mr. Rex Mendoza, former VP of Ayala Land, Inc. and the President of Rampver Financials, Inc. Ma’am Divine believes that anyone can be wealthy if they have the right mindset. She provides free consultation and seminars on Saturdays in her office in Makati. You may contact her at 0927.755.2285.
Disclaimer: The information on this site is provided primarily for discussion purposes only, and should not be misconstrued as an investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.