Mutual funds in the Philippines are now gradually gaining the attention it deserves. As more Filipinos are now resorting to investing as a way of achieving financial goals. According to a study conducted by Mylene D. Lopa, Chief Marketing and Client Officer of Sun Life Asset Management Co. Inc., 39 percent of Filipinos are now investing their money.
And investing in mutual funds is a good way to start especially for newbies due to its diversification which is important when we talk about investment. And if you are also among the many Filipinos who want to get ahead of the game by investing, you better have some understanding regarding the ins and outs of mutual funds. So, here are the answers to some of the FAQ about mutual funds in the Philippines.
Frequently Asked Questions (FAQ) About Mutual Funds
Q. What are the types of mutual funds
There are four major types of mutual funds in the Philippines.
1.) Equity Fund
Considered to be the most aggressive mutual fund thus it has the highest potential returns. However, your chance of losing money is also greater compared to the other types of mutual funds since it is invested in stocks that are volatile. But, if you are a risk-taker and want to maximize your profit, you can invest here.
- Invested in: Stocks listed in the Philippine Stock Exchange
- Objective: Capital growth and fund appreciation
- Risk: Aggressive
- Recommended investment horizon: 5 years or more
2.) Balanced Fund
This type of mutual fund is for investors who have a medium risk appetite but want to earn higher compared to bond funds.
- Invested in: Allocated on both stocks and bonds
- Objective: Medium and long-term growth
- Risk: Conservative to moderate
- Recommended investment horizon: 3-5 years
3.) Bond Fund
Ideal for investors who are looking for higher earnings compared to time deposit and money market investments but at the same time safety. If you are not an aggressive type of investor but you want to protect your money from inflation, you may want to consider this one.
- Invested in: Mostly in fixed-income instruments like government securities and corporate bonds
- Objective: Capital preservation and capital growth
- Risk: Conservative to moderate
- Recommended investment horizon: 1-3 years
4.) Money Market Fund
It is the safest among the types of mutual funds in the Philippines but also has the least potential returns. It has a higher profit than a regular savings account, checking accounts, and time deposits.
- Invested in: Short-term time deposits, corporate bonds, treasury bills, and government securities
- Objective: Diversification of bond which is accessible in the future
- Risk: Conservative
- Recommended investment horizon: Less than or up to 1 year
Q. What is Net Asset Value (NAV)
The net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities. It is generally used to identify potential investment opportunities within mutual funds.
Q. What is Net Asset Value Per Share (NAVPS)
The value or price at which investors could subscribe or redeem the shares of a mutual fund. The lower the NAVPS, the more shares you can buy with the same amount of money. It is computed as,
= Total Assets – Liabilities / Number Of Outstanding Shares
Q. Are mutual fund gains taxable
Based on the Comprehensive Tax Reform, mutual fund gains are exempted from taxes. It is one way of promoting long-term savings in the country. This is also one of the advantages of investing in mutual funds compared to directly investing in the stock market.
Q. Are returns of mutual fund guaranteed
No, mutual funds do not offer guaranteed returns to investors since it is not a fixed-income investment. All returns depend on the following factors: the amount of money you invested, market conditions, and the strategy of the fund manager. The fund manager, with the best of his knowledge and ability, will minimize the risk and losses of the investors while considering it also to be profitable.
The same with any investment instrument, investing in mutual funds also have risk. The value of your investment will fluctuate since mutual funds are invested in stocks or corporations where the prices differ daily depending on the performance. Bear in mind that it is still a paper loss unless you redeem your money.
Have your read some of the disclaimers? Here is an example.
Q. How much interest do I earn
Investing in mutual funds does not guarantee you a fixed monthly or yearly interest unlike in the banks. Since mutual funds are invested in different financial instruments but mainly in stocks (still depend on the type of mutual fund), the interest you will earn or lose will vary greatly depending on the market performance. There are times where you have some gains, and there are also when you have some losses.
Q. Do I get dividends from the companies where my funds are invested
No, but all the dividends received are added to the assets of the fund thereby increasing the NAVPS of your investment.
Q. Can I withdraw my money any time
Yes, mutual funds have no maturity period. You can keep your investment as long as you want which is a better thing to do. However, if you withdraw your funds before the holding period you will need to pay an early redemption fee. This will vary depending on the type of fund. It is also required by law to buy back the shares from the shareholders and the proceeds of any sale to be released within seven (7) banking days.
Q. Can I choose to invest in one mutual fund only
Yes, you can definitely invest in only one type of mutual fund. But, you can opt also to invest in multiple mutual funds depending on your risk tolerance and financial goals.
Q. How do I choose what type of mutual fund to invest
You have to consider your (1) goal, (2) investment horizon, and (3) risk tolerance.
Goal. What is the purpose why you are investing? Is it for your retirement fund? In preparation for your children’s education? Or in order to buy your dream house? Be sure that you really have a definite financial goal in mind.
Investment horizon. How long are you planning to keep your investment? Is it for the short-term or for the long-term? Can you keep invested for 5 years or more?
Risk tolerance. Are you a risk-taker? Or you are a conservative type of a person? The higher the risk , the higher the potential gains.
You need to answer these three factors before you start investing in mutual funds.
Q. How much is the minimum investment
Investing in mutual funds is now very affordable compared to the previous years. There are mutual funds in the Philippines that for as low as Php 1,000 you can already open an account. And the minimum additional investment can be as low as Php 500.00
Q. What are the different fees and charges in mutual funds
Charges will vary from company to company. Some of the charges are the following:
- Entry Fee (Sales Load). Your initial and additional investments will be charged up-front and charges will vary depending on the amount you invested and the type of the fund. The higher the amount you invest, the lower the fee. The remaining amount will be then the basis of your investment.
- Exit Fee. Your amount of money will not be deducted and will be invested as-is, meaning no charges. However, when you redeem your investment and it’s within the holding period, there will be charges.
- Asset management fee. A fee for portfolio management on an annual basis and calculated as a percentage of net assets under management. It serves as compensation given to the fund manager. Since mutual funds are being administered by fund managers, it is just fair also. Usually, the lower the risk of the fund, the lower the management fee. In general, money market funds have the lowest management fee, and the equity funds have the highest. This fee is imputed already as part of the NAVPS and is not reflected in any statement or receipt.
There are ways on how to defer the fees except for the asset management fee. For instance, if you are an International Marketing Group (IMG) member, as one of the benefits, you won’t be charged with an entry fee when you avail through Rampver Financials. There are also mutual fund companies that let you choose whether you will be charged upon purchase or upon the redemption. For the exit fee, do not redeem within the holding period and it will be waived.
Q. What will happen to my investment if I die
As an investor, your shares in the mutual fund will form part of your estate and will be allotted to your heirs respectively. Before your immediate family can claim the investment proceeds, they need to settle first the estate tax. One of the recommendations, in order to ease the transfer of fund shares, is to assign a co-investor upon initial investment.
Q. What should I know about buying and selling a mutual fund
Mutual funds are a mix of bonds, stocks, and other financial instruments. When you buy or sell a mutual fund, you’re also buying and selling a combination of bonds, stocks, and other financial assets. Returns will depend on the condition of the markets represented by the mutual fund.
Q. Why should I invest in Mutual Fund
There are good reasons why you should invest in mutual funds in the Philippines. If you are new in investing and do not yet possess enough knowledge especially on how to directly invest in the stock market, it can be a good choice. It requires no experience in investing but having a background on how it works is an edge. And if you want to beat inflation, this is a good option too.
Q. What is the difference between a mutual fund and unit investment trust fund (UITF)
The following are the major differences between the two:
Q. Am I required to invest subsequently – monthly or yearly
You are not required to make any additional investments after your initial investment. However, it is recommended to invest periodically especially for long-term goals. This is called cost averaging wherein you are going to top-up (make an additional investment) no matter what is the market performance whether it is bullish or bearish. This is one way also of developing your habit to save and the discipline to invest regularly.
Q. How are investors protected
If you are concerned regarding on fund manager that maybe he or she can loot your money, it is not possible. Fund managers do not have control over the assets of the fund. All they can do is just to make the buying and selling decisions. The assets are held by a custodian bank, appointed by shareholders, who in return cannot transact these assets.
Moreover, mutual funds are regulated by the Securities and Exchange Commission (SEC) and under the scrutiny of Anti-Money Laundering Law (AMLA).
Q. Is it covered by the Philippine Depository Insurance Corporation (PDIC)
A mutual fund is not insured by Philippine Depository Insurance Corporation (PDIC) because these are not ‘deposit products’. The principal amount invested is unprotected to a risk of loss thus earnings are not guaranteed also. The PDIC can only insure up to Php 500,000.00 per investor not the entire amount of your money. Instead, mutual fund companies in the Philippines are regulated by the Securities and Exchange Commission (SEC) and are required to comply with the Investment Company Act (Republic Act 2629).
Q. Why should I choose mutual funds instead of directly investing in the stock market
Investing in either of the two is good. It all depends on your preferences. But if you do not have enough time to learn about the stock market, investing in a mutual fund is a better option. Why? It is professionally managed by fund managers. The fund managers will do all the research and strategies before buying or selling your shares in order to make a profit or to minimize your losses. The amount of money needed is also smaller compared to directly investing in the stock market but it is already being diversified.
Q. Can I inform the fund manager on what to sell or to buy
You cannot tell the fund manager on what shares to buy or to sell. It is part of the job of the fund manager to conduct thorough research and analysis hence they are more equipped. The fund manager will only follow the investment parameters indicated in the fund’s prospectus.
Q. How can I earn in mutual funds
There are three ways on how to earn in mutual funds:
- Capital gains. It is when the fund manager sells an asset within the fund’s portfolio at a higher price compared to when it was bought. However, if the asset has an increase in value and the fund manager does not sell, you can decide to sell your shares instead.
- Stock dividends. This is not guaranteed and you cannot exactly tell how much since it will depend on the corporate Board of Directors. It is usually distributed quarterly, semi-annually, or annually.
- Bond interest. This will depend on the type of assets held in the funds’ portfolios. Typically, that is invested in fixed-income securities like the bond fund, money market fund, and balanced fund.
How do I invest in a mutual fund
After determining the three factors – (1) goal, (2) Investment horizon, and (3) Risk tolerance, search for a mutual fund company where you are confident to invest. Nowadays, the application can be done online. You just need to visit their websites and prepared all the requirements needed.
Or look for a Certified Investment Solicitor if you have more clarifications.
After that, you will receive a confirmation and you can start buying shares – computed by dividing the amount invested by the current price or the Net Asset Value per Share or NAVPS.
Q. Can I open a Joint Account like in banks
Yes, Joint Accounts are allowed also in Mutual Funds.
So, those are the FAQ about mutual funds in the Philippines. Now, you have some idea regarding mutual funds what will be your next step? Remember that there are things that you need to consider first before getting into any investment. And one of those things is to understand how a particular investment works. Happy investing!
Do you have some questions about mutual funds that were not discussed above? Comment it below!