All about pooled funds

Question: I attended your seminar “Steps to Financial Peace” and you mentioned about pooled funds as a good way to invest. I wanted to ask more about pooled funds but was unable to, so I’m writing you and asking you about it. I would also like to know if I can invest small amounts but on a regular basis in those funds.—Val Baguios, International Organization for Migration (IOM) staff

Answer: Val, thank you for attending my seminar and I pray that you learned much from me and the other speakers. It seems the seminar achieved its objective since you are now asking about pooled funds for your investments.

Let me start by defining what a pooled fund is, borrowing the definition from Investopedia.com: “Funds from many individual investors that are aggregated for the purposes of investment, as in the case of a mutual or pension fund. Investors in pooled fund investments benefit from economies of scale, which allow for lower trading costs per dollar (peso) of investment, diversification and professional money management.”

It looks like the definition made it more complex than it really is. Pooled funds are investments where people put their money, with an investment manager handling the investments. To explain further, let me use this analogy: Assuming you want to invest but do not know the first thing in investing in stocks or bonds. You can join a “pool” of investors who allow an investment manager to invest for them, subject to the objectives of the fund. Since there are many investors in the fund, the amount generated by the fund becomes sizeable and an investment manager will invest it for you. The investors actually own the funds and the investment manager (usually an institution) simply manages it. Ownership of the fund is through shares, much like owning shares in a corporation. Of course, the investment manager earns from this arrangement through the charging of management fees.

Investing in pooled funds is all about knowing your objectives or purpose, and identifying your risk appetite. Typically, pooled funds in the Philippines fall under three general categories, according to their risk profiles: low, moderate and high risks. For low risks, you can get into money market of bond funds, which are usually investment in government or investment grade debts such as treasury bills and notes, commercial paper and corporate bonds. The said debt instruments are commonly referred to as fixed income. Since these instruments are theoretically “safe” instruments and volatility is minimal, don’t expect your money to grow substantially. I would be happy to see the yields of these funds at 2 percent above inflation rates.

However, there are certain situations that fixed income funds perform admirably. Contrary to popular belief, fixed income instruments are actually traded actively and a fund can experience good capital growth in the said funds. However, as a general rule, these bond/fixed income funds would give you unremarkable yields but would generally perform better than typical bank deposit products over a long period of time. The question you might have in your head is, “Can you lose money in a bond/fixed income fund?” The answer is yes, as they perform according to the market, which is ultimately influenced by supply and demand. Here is the counter, over a longer period of time, say five years, the probability of losing money in this kind of funds becomes very low. The bulk of the investments made in this country gord to debt instruments.

Since your query needs a longer answer, and rather than sacrifice its substance by just wantonly summarizing my explanation, I hope you don’t mind if I split this subject into two parts.

The conclusion to this column will appear after two weeks.

(Randell Tiongson is an advocate of life and personal finance. He is a director of the Registered Financial Planner Institute (Phils.) and has over 20 years’ experience in the financial services industry. For questions, write to [email protected]. For more info about RFP program, visit www.rfp.ph.)