Back to Basics - Mutual Funds Investment in the Philippines

A mutual fund is an investment method which pools in money from a large group of investors, either individuals or corporations, and invests the funds to financial securities such as treasury bills, treasury bonds, corporate bonds, equities and other financial instruments. Mutual fund companies in the Philippines are investment companies registered with the Security and Exchange Commission or SEC.

Investing in mutual funds provides a variety of benefits. These include higher income potential, diversification of investments, professional fund management, and low capital requirement. To better understand mutual funds, let’s talk about some more details that a new investor may find helpful.

Types of Mutual Funds

There are several types of mutual funds depending on what types of financial securities the funds are composed of.

1. Money Market Funds are funds invested in fixed-income securities which have short-term life-span. This means these securities mature in a year or less.
2. Equity Funds are funds invested in a certain list of stocks in the Philippine Stock Exchange. It offers the highest potential for investment growth but also carries the highest risk due to the volatility of the stock market.
3. Bond Funds are fund invested in fixed-income securities like bonds, commercial papers issued by corporations and treasury notes from the Philippine government.
4. Balanced Funds are fund invested in bonds and equities. The level of risk and the return on investment for balanced funds may be considered to be between bond and equity funds.

Why Invest in a Mutual Fund?

Nowadays, mutual funds are popularly known as a good way of building wealth through capital appreciation over time. Even investors with restricted or limited resources can take part and invest in a mutual fund. Aside from the fact that it is a very good alternative to increase an investment portfolio, investors need not worry how the investment fund will be managed. It will be handled by a professional fund manager.

Advantages of Mutual Funds

Mutual funds offer variety of benefits over other forms of investment.

• Professional Fund Management

As stated, this is indeed beneficial especially for small investors. Mutual funds do not require investors to hire professional managers who will analyze what forms of financial securities in the market will give their desired returns. Once the investor invests in mutual funds, the management of the fund is part of the company’s responsibility. Although this comes with a fee that is deducted from the fund, it could be worth the price.

• Requires Low Capital

Mutual funds in the Philippines only require as low as 5,000 pesos minimum investment and 1,000 pesos additional investments. This is reasonable and attainable for people who have limited sources of capital.  Contrast this advantage with direct investments which require high capital outlay. For example commercial papers and treasury bonds need a minimum investment in the range of 100,000 pesos up to 1,000,000 pesos depending on the bank or the specification of investment product.

• Diversification, Liquidity and Safety

No form of investment can guarantee success. There’s always some risk involved. But one way to reduce the risk in investing is through diversification. With mutual funds, you are automatically guaranteed of diversification since the fund is normally invested in a variety of securities.

Liquidity is the ability of the investment to be converted to cash immediately. Redemption of the profits must be processed within 7 banking days from the date that the request for a withdrawal is submitted. This level of liquidity is good considering the potential return on investment.

Mutual fund companies are registered and recognized by the Securities and Exchange Commission under the Investment Company Act and its implementing rules. Companies are required to submit reports to the SEC and to their shareholders. These government regulations are there to aid in the safety of the investments and the investors.

• Higher Returns Potential

Mutual funds are capable of providing higher returns to the investor since the funds are managed as a single portfolio. The huge amount of capital available to the fund manager can provide economies of scale with his or her investing strategies.

Mutual funds are gaining popularity in the Philippines. Most investors prefer to choose a mutual fund type from a company they can trust and let the fund managers worry about the rest. It’s not a bad idea if you have the resources available.

Photo Credit: 401K 2012 (Creative Commons)