Curiously, mutual fund is one of the most underrated financial instruments in the Philippines. There are still quite a big number of Filipinos who are not familiar with it. Kudos to you for joining the ever growing number of financially savvy Pinoys itching to learn more about this financial instrument. The fact that you’re reading this article is evidence to your thirst for knowledge.
As an introduction, this is the first piece for what would be a series of articles geared toward sharing my knowledge, opinion, and thoughts regarding finance and real estate. I’ll be doing the heavy lifting, filtering out and breaking down the financial blobs for you into bite-size pieces.
The Internet is filled with articles such as these which is a good thing. As I would like to say, the more people there is, the louder the noise, the better chances other people would hear the message—or something to that effect.
So, yes, let’s us start with mutual fund. As I’ve mentioned, it is one of the best financial instruments created by man. The love for money, affluence, and the good life—not greed—brought him to create this. It’s an ongoing love affair and Filipinos are getting hooked to it.
The term mutual fund is self-explanatory. Mutual, because two or more people have the same goal and fund, and obviously because people involved here will deal with money.
The concept of mutual fund was created for the sole purpose of providing the investing public with cheap, virtually safe, and easy-to-use financial instrument. A person could simply put (or to be savvy, invest) money into a mutual fund company. Here in the Philippines, the lowest investment capital is pegged at Php5,000, or equivalent to about 27 venti-size Java Chip frapuccino from Starbucks. In exchange for that, the person will receive shares of the mutual fund company, officially called the Net Asset Value Per Share (book value for short). Then after that comes the best part: the person wouldn’t really have to do anything—all he or she needs to do is let the mutual fund manager do the work of increasing the value of the fund.
Basically, at this point, the person is now called an investor.
Going to the details, a person who would like to invest in mutual funds would have to decide between three options: equity (stocks) fund, bond fund, and balanced fund.
To explain further, equity funds are funds invested in companies listed in the Philippine Stock Exchange. Investors here would like their money to grow fast.
Bond funds are those invested in government- or corporate-issued securities (more like “utang” by the government or by a company). This fund provides investors with slow but stable growth on their money.
Lastly, balanced fund are funds invested in both equity and bond fund. The benefit here is that the investor would enjoy growing their money quite moderately while enjoying fixed-income rewards.
Although, there is this one other fund called money-market fund, primarily invested in short-term debts, bank notes, and time deposits, money here doesn’t really move much, so let’s skip this one for now.
To truly realize money growth, investors should consider a long-term time-frame; like a plant, money takes time to grow and bear fruits. The only difference here is that you wouldn’t need to handle the plant on your own as you have a gardener in the form of the fund manager.
Now, going to the math, let’s crunch the numbers.
For example, in March 23, 2014, you invested Php5,000 in equity fund. The value of the fund (net asset value per share or NAVPS) at that time was Php1.50. Simply divide Php5,000 by Php1.50, you get 3,333.33333 shares.
Now, you keep that close to your heart as those shares would be the basis for you to get rich; having those shares means that you own 3,333.33333 of the whole equity fund.
Let’s say, one year later you would like to get your money, now all you have to do is check how much is the current value of the fund (NAVPS). For simplicity purposes, the value of the fund now is Php3.00.
All you have to do is multiply your shares, which is 3,333.33333 over the current fund value, Php3.00. You come up with the magic number of Php10,000. Your investment doubled, without you doing anything!
Of course, you have to understand this computation was made for you to grasp the concept. In real life, there would be entry and exit fees. The fees differ from one company to another, but most of the time the fees are below 3 percent of the amount of investment. These fees would pay for the fund manager and other support services being done to grow your money. Remember that this is business, and the mutual fund company also have to earn money.
In the Philippines there currently around 39 mutual fund companies and as far as I know, IMG (or the International Marketing Group) is one of the most active organizations providing financial literacy classes for free, and through one of its partner companies, one could invest in the country’s top four mutual funds companies.
In my succeeding articles, I would share how and why certain mutual fund companies do better than their peers. Secrets would be revealed in my next column.
Just a little trivia, as of February 2014, assets under management (or investors’ money being handled) by First Metro Asset Management Inc. is around Php14.7 million. Philam Asset Management Inc. has assets under management of Php38.47 million as of November 2013.
Now, that’s a serious love affair, don’t you think?
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