How mutual funds make your money grow

PAMA

With a growing economy and as more and more Filipinos earn more, investment opportunities have become very appealing to those who want to further grow their hard-earned money faster than just depositing them in banks.

For those who want to start their investments small but gain big, the mutual fund is the way to go, according to the Philippine Investment Funds Association Inc. (Pifa), a group composed of 10 fund management companies behind 53 member funds.

“Mutual funds have been gaining reception since Filipinos have become more financially aware,” says Pifa chair Valerie N. Pama.

“Though savings accounts and time deposits had been the favorite ‘investment’ of Filipinos in the earlier years, more and more of us have discovered that there are other attractive investments such as mutual funds. It is a realization that the money we save can actually start to earn for us,” she adds.

So what exactly are mutual funds? Pifa defines a mutual fund as “an investment company that pools the funds of many individual and institutional investors to form a massive asset base.”

This is how it works: The combined assets are put in the hands of a professional fund manager, who then seeks lucrative security—bonds and stocks—investments. The full-time fund manager maintains the investments while also making sure that these comprise a diverse portfolio.

Dubbed as owners or shareholders are those who purchase shares of a mutual fund, whose money are being spent by the manager in buying bonds or stocks.

How can a mutual fund then make more money from investments? It can in two ways: When the securities pay dividends and interest, and when the investments’ value increases. “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,” according to Pifa.

Options

Is it just easy and simple to venture into a mutual fund investment? If you ask Pama and Pifa’s members, they are sure to answer that it will be a breeze.

“Investing in mutual funds is practical and convenient. With just P5,000, anyone can invest in a mutual fund,” Pama notes.

There are four basic types of mutual funds in the country: Balanced, bond, equity or stock, and money market. Pifa explains their differences as follows:

Balanced funds invest in both bonds and shares of stocks. According to Pifa, the mix grants access to the “growth potential of stocks” but “tempered with the presence of secure fixed-income instruments.”

Bond funds invest mainly in the treasury bonds issued by the Philippine government as well as in commercial paper issued by corporations. “Having a full basket of only fixed-income securities, bond funds provide capital preservation while maintaining a conservative stance in terms of asset allocation,” Pifa says.

Equity funds invest mainly in shares of stock issued by corporations. “The dominance of stock issues within the portfolio positions the fund to attain a more aggressive rate of growth.”

Money market funds invest in fixed-income funds that have shorter terms of investments of only a year or less, hence also “conservative,” says Pifa.

“As far as returns are concerned, equity funds are the most attractive since these have provided the highest returns over a long-term investment horizon,” according to Pama.

Pifa data showed that bond funds remain the most popular among Filipino investors with almost half of the industry’s assets under management worth about P105 billion in such investments.

That said, Pama points out that “it’s important for us to understand that every type of fund has different characteristics and various levels of risk.”

Tips

To those who want to embark on an investment journey alongside mutual funds and determine which type would suit them best, here are Pama’s tips:

For beginners, it is best to assess themselves first before choosing the right mutual fund. You can start by determining your financial goals—are you looking to grow your money enough for a car or a house? Setting aside funds for your child’s tuition? Or just aiming to beat your bank’s savings and time deposit rates?

Once set, you can then dig deeper by evaluating your investment horizon and tolerance for risk. These may serve as your guide in choosing which investments are appropriate for you.

“Mutual funds help you achieve your different financial journeys but it is important to know where you want to go first,” Pama says.

To illustrate, Pama offers this analogy: “If you’re just going to the building nearby, you will walk. But you’ll take a car if you want to go to another city. And if you want to travel to another country, you’ll take a plane.”

“Mutual funds are like that—the type you choose should be the one that best helps you reach your destination,” she says.

The interest in mutual fund investments has flourished in the past few years, Pama shares.

Confidence

“Currently, there are more than 245,000 investors and more than P240 billion assets under management [as of January 2015] for mutual funds. This speaks volumes of the confidence that the investing public has given our industry,” she notes. In 2010 or just five years ago, their assets under management stood at a mere P68 billion.

Pama also cites the “more than satisfactory” returns being brought by member-mutual funds to investors. “Our members have returned an average 18.85 percent for equity funds, 15.5 percent for balanced and 6.39 percent for bonds per year over a five-year period.”

“Pifa has been at the forefront of this tremendous growth. The association and its members have been integral in developing the industry and cultivating the best practices that cater to our investors,” Pama says.

“I am proud to say that all our members have contributed in improving the financial welfare of Filipinos across the country. We have given Filipinos an attractive investment option that allows them to participate in the capital markets, not just here in the Philippines but also abroad,” she adds.

In this regard, Pifa has been very active in educating as well as enjoining the bigger public to invest in mutual funds.

“Pifa also puts much importance in educating the general public—not just about mutual funds but about financial awareness as a whole. Pifa conducts an annual Mutual Fund Awareness Week where people of different walks of life can learn more about investing and broaden their financial perspective,” Pama shares.

The group last held its Mutual Fund Awareness Week in March at the Century City Mall in Makati City, during which free seminars were held for two days alongside free financial consultation with the 10 fund management companies.

“Pifa has always been there to support friendly competition among our member-funds. We are committed to ensuring that the investing public is presented with a wide array of investment funds to choose from,” says Pama.

Education

During the recent Mutual Fund Awareness Week, Pifa also disclosed plans to further open up opportunities for Filipinos to access mutual funds online very soon.

Pifa was first known as the Investment Company Association of the Philippines or Icap when it was formed by five member-funds in 1995. Twenty years later, the group grew leaps and bounds alongside greater interest among the investing public.

“[M]utual funds have grown at a pace which will make the industry a formidable one to deal with in the near future. The industry has helped in maintaining investor confidence despite the prolonged Asian crisis. It has minimized capital flight and has brought new perspectives in terms of the investment and savings maturity in the country. Given the need for the country to compete in the global markets, mutual funds will certainly serve as a vital ingredient for current and future national development,” Pifa says.