All About Financial Planning - Philippine Setting

Due to insistent public demand and the growing awareness on Mutual Funds, we’d like to elaborate on this topic more. What really is Mutual Funds and why is it making such a big intrigue to a lot of us, having a higher interest rate than the usual bank deposit? Isn’t this one of those SCAMS that victimized a lot of people in the past loosing a lot of their hard-earned money?

Read on so that you will be enlightened just like me when I got to know this Mutual Funds. (These are taken from the Investment Company Association of the Philippines (ICAP) which has all the mutual fund companies registered with and licensed by the Securities and Exchange Commission (SEC) - talking about legality eh) (http://www.icap.com.ph - best viewed in Internet Explorer)

What is a Mutual Fund?

A Mutual Fund is an investment company that pools the funds of many individual and institutional investors to form a massive asset base. The assets are then entrusted to a full time professional fund manager who develops and maintains a diversified portfolio of security investments. People who buy shares of a mutual fund are its owners or shareholders. Their purchases provide the money for a mutual fund to buy securities such as stocks and bonds.

A mutual can make money from its securities investments in two ways: a security can pay dividends and interest to the fund, or a security can rise in value. The fund passes any dividends, interest or profits on the sale of its portfolio securities, less fund expenses, to shareholders in the form of distributions.

Different Funds, Different Features

In the Philippines , there are currently four basic types of mutual funds

1. bond
2. money market funds
3. stock (also called equity)
4. balanced

Bond funds invest primarily in bonds such as treasury notes issued by the Philippine government and commercial papers issued by reputable companies in the Philippines . Having a full basket of only fixed-income securities, bond funds provide capital preservation while maintaining a conservative stance in terms of asset allocation. Like bond funds, money market funds also have a conservative stance since they have a full basket of fixed income funds. The main difference lies in the term of investments of money market fund investments, which is one year or less. Equity funds invest primarily in shares of stock issued by Philippine corporations. The dominance of stock issues within the portfolio positions the fund to attain a more aggressive rate of growth. Balanced funds invest in both shares of stocks and bonds, thereby accessing the growth potential of stocks tempered with the presence of secure fixed-income instruments. Professional fund managers create value for shareholders by providing superior yields within controlled risk exposures. Certainly, expective in both security selection and asset allocation go a long way in ensuring better long-term rewards for mutual fund investors.

Which Mutual Fund is the Best to Invest?

As told by my mentors, it really depends on your personality. Rule of thumb would be, the higher the risk, the higher the return of investment. If you are the conservative type without tolerance to the ups and downs of the market, then go for Bonds and Money Market Funds. These have very minimal risk although you can’t expect high return as well. However, if you have high tolerance on risks and your primary aim is capital growth, then you could go with Stocks or Equity. These can give you the highest return although the risk is much higher. Balance funds are on the medium level since these are invested both in bonds and stocks.

Investing Guide on Mutual Funds

Looking at the different types of mutual funds and their risk level, the more appropriate approach would have to investing in all types. These will definitely give you the leverage to maximize the return of each. And since the market is in up and down motion, you can be sure that neither one goes up or down, still you have the edge.

Also, one must understand that investing in Mutual Funds are for long term plan like Retirement or Educational. It not like the bank wherein you can get your money any time you want and still enjoy the 1% interest. With mutual funds, it is different. Usually, you can get the maximum benefit if its for 5 year or longer investment.

I’m Convinced - How Do I Invest in Mutual Funds?

To invest in Mutual Funds, you simply fill up the application form of your chosen Mutual Fund Company thru a broker like myself. The minimum investment vary from company to company - Php5,000 for some. In buying mutual funds, you sometimes have to pay entry fees called sales fees/load. If you sell your mutual fund earlier than a specified time, a mutual fund may also deduct from the proceeds of your sale an exit fee called a redemption fee/back end load.

To realize earnings on a mutual fund, you just compare the current net asset value per share (NAVPS) of the fund with the fund’s NAVPS at the time you bought it. NAVPS is the daily price of the fund that is published daily in newspapers and posted on web sites. (i.e. ICAP, Businessworld, INQ7Money). If you want to compute for the effective earnings though, you should include the cost of sales and redemption fees, if any.

When is the Best Time to Invest in Mutual Funds?

With the current market situation, I must say that the Best time to Invest in Mutual Funds is now. Why? Because the market is currently down and you can greatly take advantage of the cost per share which is very low at the moment.

For more questions on Mutual Fund, you may email gary@gigabytesdesign.com.ph or text at 09164147400.

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