Build your Wealth. Invest in Mutual Funds.

How does one create wealth? To ordinary people the secret to building wealth is making money and saving money. But to ordinary people with extraordinary wealth – the world’s 26 richest men who own as much as the total wealth of the 3.8 billion people (or 50% of the world’s population) – the secret to achieving financial success boils down to three things: making money, saving money, and INVESTING money (one option is to invest in mutual funds).

The Wealth Secret of Filipino Entrepreneurs

Let us not look far. What do Filipino entrepreneurs like Henry Sy, Sr., John Gokongwei, and Manny Villar have in common? They are all billionaires! As we all know they have amassed a great fortune from their businesses. But little do we know that these tycoons are not only entrepreneurs BUT investors, too! Aside from building income from their business portfolio, they have also built their wealth by investing in stocks, mutual funds, and other financial securities in the market.

Obviously, wealthy people have figured out how to invest and grow their money over time. They have learned not just to work for the money but also to make their money work for them.

MAKING MONEY WORK FOR YOU

Working for money and making money work for you are two different things. The former is all about YOU exhausting your energy and effort to earn a living. The latter is about MONEY generating income for you so that time will come that you won’t have to work anymore, and you will have more than enough means to live the kind of life that you want.

Work is Temporary

Let us admit, we cannot work forever and there’s no job security anymore. Your boss can fire you anytime. What if your company shuts down? No one is indispensable. Gone are the days when attaining a college degree, working for eight hours or more, working abroad, or climbing the corporate ladder guarantee financial security.

Key to Success and Wealth Creation

What then is the key to success and wealth creation? It is MAKING MONEY WORK FOR YOU. How does one make it happen? In practice, it could mean investing in securities such as stocks or mutual funds that will enable you to GROW your money, just like what the rich are doing! Basically, these investments provide investors with passive income as opposed to an employee’s active income.

Some would say, “I don’t have the money, resources, time, and skill to do business. I have been working for years now trying to make ends meet. Do you mean I can I still be wealthy despite being just an employee if I know how to invest my money?”

Precisely! Now, let’s get straight to the heart of the matter. It’s time to unlock one of the secrets to making money work for you – investing in MUTUAL FUNDS.

MUTUAL FUND BASICS:

Investing in Mutual Funds is simple and easy.

To understand it better, I have outlined below some of the fundamentals that you need to know:

  • Mutual Fund Definition
  • Direct Stocks Investing vs Indirect Investing
  • Advantages of Investing in Mutual Funds
  • Safety Features of Mutual Funds
  • Net Asset Value Per Share (NAVPS)
  • 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 fund that pools or collects money from various investors and invests this money in a wide array of securities such as stocks, bonds, money market instruments, and other similar assets.

When you invest in mutual funds, you are actually buying shares of stocks of publicly-listed companies for the purpose of generating income.

Mutual Fund Shares

Each share represents a part-ownership in the fund, therefore, shareholders participate proportionally in the gains and losses of the fund.

Investing in mutual funds is buying a business that you don’t personally manage. Instead there is a professional fund manager who will manage your fund. This is why it is considered a stress-free way of investing. All you have to do is invest your money and let the mutual fund company manage it for you. In that way, your focus is to work harder so you can earn more, save more, and invest more! Sounds interesting!

Is a Mutual Fund Investment appropriate for you?

A Mutual fund is appropriate for people who have limited funds and insufficient knowledge of the stock market, and who don’t have time to monitor their stocks.

Direct Stock Investing vs Indirect Investing (Mutual Fund)

Some investors prefer direct stock investing or individual stock picking. Here, direct stock investors take charge in trading (buying or selling) stocks online. Traders themselves monitor and time the market. In reality, while investing directly in stocks can provide greater returns, however, it poses more risks than investing in mutual funds.

It pays to have at least a basic understanding of the fundamental and technical analysis of stocks before throwing in the towel to the world of direct stock investing.

Is Direct Stock Investing for you?

Direct Stock investing works best for investors who are risk-takers and experts and have time to monitor their stocks amidst the volatility of the market.

To know if trading suits you, ask yourself, “Do I have sufficient knowledge of the stock market?,” “Do I know how to pick good stocks over the bad ones?,” “Will I have the time to study and monitor my stocks on a day-to-day basis?.” If you answer “yes” to all these questions then direct stock investing is for you.

Unlike investing in individual stocks one at a time in direct stock investing, you invest in a collection of shares of stocks in a mutual fund. You become a part owner of not just one but multiple companies like Jollibee, PLDT, SM Investments, Ayala Land, Meralco, Universal Robina Corporation, GMA7, BDO, BPI, and other Blue Chip companies. Great! You will not only be a consumer but also a shareholder of various companies.

What are the Advantages of Mutual Funds?

Professionally Managed.

Mutual Funds are managed by professional fund managers who have the competence to select stocks and the time to study and monitor the funds. The fund manager, along with his/her research team, strictly monitor local and global stocks, 24/7.

Affordability.

The initial investment amount varies depending on the type of fund. Certainly, there are funds that offer an initial investment as low as Php 1,000 and a minimum additional investment of Php 500.

Liquidity.

Investment is redeemable (withdrawable) anytime! So you don’t have to worry not getting your money when you need it. Mutual Fund companies are mandated by law to pay investors within seven (7) banking days from the time of redemption request.

Redemption request may be made via email, facsimile, or over-the-counter.  Payment, on the other hand, can be made through direct bank credits or check pick-up, at the discretion of the investor.

Diversified Investment.

Investing all your money in a single company could be highly profitable but it could also be risky in such a way that you might lose 100% of your capital. It is therefore recommended that you diversify your money into different investment vehicles to reduce this risk. One way to do it is to spread your money into stocks, bonds, real estates, and savings accounts.

Convenience.

You may open an investment account with a brokerage firm or through a broker, agent, or solicitor.  You may fund your account by depositing the amount in any of its accredited banks or via online bank transfers. Once your account is open and funded, you can now use it to buy your mutual fund shares.

Highly Regulated.

Mutual Fund Companies are highly regulated by the Securities and Exchange Commission (SEC), and are governed by the Investment Company Act (ICA) of the Philippines. This encourages investor confidence since their interest is protected by the law which is enforced by an authorized agency.

Stress-free Investing.

Investing in mutual funds spare investors from the tedious work of researching and studying of the stock market. It frees them from the burden of constantly monitoring their stocks especially during any market downtrend. It also liberates investors from the emotions that come with it such as fears and worries, enabling them to focus on their priority like business, family, or job.

Stress-free Investing

What are the Safety Features of Mutual Funds?

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:

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. They 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, who occupy the highest positions in the organizational structure, have a voice in significant decisions such as in voting and electing Board of Directors.

Waiver of Pre-emptive Rights. The Articles of Incorporation shall include this provision so that shareholders need not to worry about dilution of their ownership or proportionate interest of 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 and cover possible redemptions by investors.

Custodianship. ICA requires that all proceeds from the sale of an investment company 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 objectives of an investment company can only be changed upon the approval of its shareholders. Any changes in the objectives thereof must also be duly stated in the fund’s prospectus.

OTHER SAFETY FEATURES

Investment Limitation.  Investment companies are not allowed to invest more than 10% of its net asset value in a single company.

For example, the maximum investment that a company can make in Jollibee Corporation alone should be not be more than 10% of the fund’s total net asset value.

Unallowable Investments.  Investment companies are not allowed to invest in the following:

  1. Margin purchase of securities
  2. Commodity futures contracts
  3. Precious Metals
  4. 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 its previous year’s audited financial statements.  This is to discourage them from incurring excessive or unreasonable expenses.

Limit on Borrowings.  Investment companies may borrow or incur debt provided that there is a 300% asset coverage for all its borrowings. In case a company exceeds the 300% rule on borrowings, it shall be given 3 days 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 this should be published in at least 2 newspapers of general circulation.

As mentioned above, in case of redemption, the fund is expected to pay the investor within 7 days from the date of their 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
  • quantity of shares redeemed and the total amount of redemption
  • total number of shares outstanding at the beginning and end of the month
  • percentage of the outstanding shares owned by Filipinos

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 changes daily. To find out the updated NAVPS of all mutual fund companies in the Philippines, simply click the mutual fund icon below homepage:

How do you Earn from Mutual Funds?

Earnings may be in the form of:

  1. Capital Gain or Capital Appreciation. This refers to the gain from the sale of the securities. Ccapital gain is the difference between the NAVPS at the time the shares are bought and the NAVPS at the time the shares are redeemed.
  2. Dividends (cash or stocks) earned on stock investments
  3. Interest Income on debt securities such as bonds and treasury bills

Classification of Mutual Funds

A. Equity or Stock Fund.

This fund invests primarily in shares of stocks. Fund managers, invest a little portion of the fund in fixed income securities.

An equity fund normally provides investors with a higher possible return but posts higher risk. The average historical rate of return of equity funds in the Philippines is around 18%.

This fund is appropriate for:

  • The Aggressive type of investor whose aim is capital appreciation, growth and with some income.
  • Risk-takers. This is for investors who are willing to take more risk.
  • Younger people. If you are young, say, in your 20’s, investing in equities is a good option.  Why? Because you have longer time to let your money grow and tolerate the ups and downs of the market.

 

But again, assess your risk tolerance, identify your objectives, 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.

This fund invests in a mix of stocks/equities and fixed-income securities, usually a balance between the two. The average historical rate of return of a balanced funds is around 12%. This fund is appropriate for investors whose want safety and capital gain. If you want a higher return but minimal risk, you can start with a balanced fund.

 

C. Bond or Fixed-Income Fund.

This fund invest mostly in government bonds and corporate bonds that earn fixed interest and maturity. Fund managers invest a little percentage of the fund in money market instruments like commercial papers. This fund is 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 a corporation with good credit standing. If you are a conservative investor who wants a steady cash flow or if you are nearing retirement with shorter time period to invest, this fund could work best for you.

D. Money Market Funds. This is short-term investment in fixed income securities such as treasury bills, commercial papers, and certificates of deposit.

This fund is generally safer but offers a lower potential return than the other types of mutual funds. This fund is a good alternative investment for people who plan to redeem their money in less than a year’s time.

E. Index Fund. This fund simply tracks the performance of a specific index such as the Philippine Stock Exchange Index (PSEI). When you invest in this type of fund, you are actually investing in a portfolio of stocks that have almost the same weights and composition as those of the composite index of PSE.

Since this fund is just a simple tracking of an index and fund managers do not need to do extensive research, it tends to have lower costs and fees than other funds.

The above-mentioned funds are the most popular in the market. There are, however, other funds from which investors can choose from such as Exchange-Traded Funds (ETF’s), Specialty Funds, and Global Funds.

How to Invest in Mutual Funds

Investing in a Mutual Fund is just like opening a savings account in a bank.

Step 1. Open an account.

Mutual funds are distributed by authorized brokerage firms and brokers.

To invest in mutual funds, open an account with a trusted brokerage. If you have none yet, I could recommend a brokerage firm with which we are currently transacting our mutual fund investment accounts. Check out Why I Invest in Mutual Funds through IMG.

Step 2. Fill-out the following forms:

  1. Investment Application Form (IAF)
  2. Investor Risk-Profiling Questionnaire
  3. Account Opening Form (AOF), and
  4. Signature Card

 

Attach the following required documents:

  1. Photocopy of 2 valid ID’s. (Don’t forget to affix your 3 signatures).
  2. For joint accounts, attach 2 valid IDs of the primary and the co-investor. For In-Trust-For (ITF) account, attach a photocopy of Birth Certificate.

 

Step 3. Pay through its affiliated banks or through online money transfers.

You may also transact directly to the brokerage firm through cash or check payments.

Important Reminder: As you fill-out forms, make sure not to leave any information blank. You should also have your Tax Identification Number (T.I.N.).

For students, you may supply you parent’s T.I.N.

According to the Philippine law, any person of legal age (18 years old and above) in the Philippines may invest in mutual funds.

Whereas for investors abroad, please note that all documents should be original so you may submit them through courier.

FINAL THOUGHTS

All things considered, investing in a mutual fund gives anyone with zero or little experience a fresh start to develop his/her earning potential.

You don’t need to have a lot of money before you can start investing. You also don’t have to devote time in managing it. What is more important is you align your goals with your investment strategy. Invest early. invest regularly, invest long-term.

The rule of thumb is: Don’t just work for the money. Make money work for you! Build your wealth. Invest in mutual funds!

Happy investing!

Your feedback is important to us. Please feel free to comment below.

 

 

About the Author

Divina Gracia M. Cabaddu

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.

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