By now, you should already have an idea of the basic concepts behind mutual funds. As an investment tool, mutual funds are very flexible and you can use them for setting up various financial plans such as:
- Short-term Savings (Emergency Funds, Alternative to a Time Deposit)
- Mid-term Financial Goal (Down Payment for house or car, startup capital for small business)
- Long-term Financial Goal (College and Retirement Funds)
For those who are smart and quick to pick-up on the idea, the very first question they ask is, “How do I invest in a Mutual Fund?”
To the uninitiated, it may come as a surprise that investing in a Mutual Fund in the Philippines is really very simple — and very affordable, too.
The only requirements would be:
- Government-issued IDs like Driver’s License, PRC ID, SSS, GSIS Card, or even passport.
- An initial investment money. The minimum amount is only P 5,000; that’s the minimum set by the Law. However, some funds would require bigger amount so you should check with the mutual fund dealer.
- Even foreigners can invest (additional documents may be required). In fact, foreigners are among the biggest Equities Fund investors in the country today!
If you can open a bank account, you can open a mutual fund investment account. In fact, you should.
Here are the steps:
- You get in touch with an SEC-Certified Investment Solicitor (CIS). He is the Mutual Fund Advisor licensed by the SEC to represent an Investment Company.
- The CIS gives you the prospectus of the various mutual funds. He also explains the details of the prospectus such as the Investment Objectives, fund policies, fees and expenses, and the risks associated with the investment.
- You open an account with the Mutual Fund by first filling up an Investment Application / Subscription Form and also a Customer Information Sheet.
- You pay for the initial subscription either in Check or in Cash.
- You get an Official Receipt (OR) for cash payment. For check payments, the name of the Mutual Fund Company should appear as The Payee in the check. You should also get Provisional Receipt (PR) for check payment.
- The CIS the submits the forms to the Mutual Fund Distributor.
- If you paid in check, the CIS gives you an Official Receipt to replace the RP issued in step 5.
What??? Seven steps? That’s a lot!
Hmmm… I know how much you hate to read, but to make it simple: Prepare your IDs, your investment cash or check, talk to a Mutual Fund Agent or Advisor.
Now, if you are a visual kind of guy, here’s for you:
The Mutual Fund Players and the Roles They Play
Aside from the different Laws, Regulations and Guidelines put in place by the Government of the Philippines through its various agencies and mainly through the Securities and Exchange Commission, different corporate entities are also involved in Mutual Fund Investment Transactions, such as:
- Safekeeping the money of the funds
- Keeping the investors records
- Buying and selling shares of the mutual fund
- Reviewing the Financial Statements
All these are intended to ensure transparency, safety and to protect the investing public.
1. Investment Management Company or Investment Adviser
This is the umbrella company that carries the different mutual fund products under management.
An example of this would be the First Metro Asset Management Incorporated (FAMI). Their main purpose is to run the daily operations of the company according to the guidelines and policies laid down by the board of directors.
2. The Mutual Funds
Each Mutual Fund is setup as a company on its own, with its own set of officers, employees and board of directors.
An Investment Management company usually has several different Mutual Fund companies under it. FAMI, for example, has 5 mutual funds, namely:
- First Metro Save & Learn Equity Fund, Inc
- First Metro Save & Learn Fixed-Income Fund, Inc
- First Metro Save & Learn Balanced Fund, Inc
- First Metro Save & Learn Dollar Bond Fund, Inc
- One Wealthy Nation Fund, Inc
- First Metro Exchange Traded Fund, Inc
Did you notice the INC at the end of each company name? That’s short for “Incorporated”.
It means that every mutual fund company is actually a corporation. When you invest by buying shares of the fund, you become a shareholder of that particular company. It’s that easy!
3. Board of Directors
In a Mutual Fund, the Board of Directors are responsible for setting the fundamental investment policies of the company.
Each mutual fund has its own set of board of directors apart and independent from the board of directors of the Investment Management Company.
As an investor, you can actually vote for the people who sits at the board of your chosen mutual fund. You may exercise this right once every year during the Annual Shareholders Meeting.
4. The Distributor
This company is basically responsible for selling the fund’s shares to anyone who wishes to invest in a specific mutual fund. In many cases, the distributor may also be the same company as the Investment Company Adviser that was mentioned in item #1. When you redeem (or sell) your shares, this is also the entity that you go to and maybe with the assistance from your CIS.
This is you – if you invest in a mutual fund, no matter how small your investment.
A Mutual Fund is a special type of corporation that can issue an unlimited number of shares to any investors.
To invest, you simply buy common shares of the fund and thus, you become a shareholder or stockholder of the company.
(Review the topic above for the general process of buying shares in a mutual fund.)
As such, you are covered by the same law the protect the rights of common stockholders of any corporation in the Philippines.
But there is the one right that is unique to mutual funds: Right of redemption – which refers to the fact that you can dispose of (or sell) your shares anytime and the Mutual Fund company would back it back…. no more waiting for the right buyer. The Fund stands ready to buy your shares anytime… no questions asked.
Liquidity, which refers to the convertibility of an investment into Cash, is one of the most desirable features of a Mutual Fund investment.
5. Custodian Bank
Holding the Mutual Fund company’s assets for safekeeping is the special function of this commercial bank.
So if you are asking where your money goes when you invest in a Mutual Fund, this is the main entity that keeps your investment money and those of other investors. The money is not kept in the Mutual Fund company nor in any of its distributor companies.
Question for you: Can a mutual fund company take the investor’s money and run away?
6. Transfer Agent
This is another bank whose responsibility is to facilitate:
- the transfer the fund shares;
- the disbursement of dividends;
- the maintenance of shareholder records.
The last function is very important to the skeptics. Remember this: Mutual Funds can NEVER tamper, alter, litter on your records.
You already know from item #5 above that a mutual fund doesn’t keep the investors money. This part tells you that the mutual fund does not even hold the records of the shareholders. That role is played by the transfer agent and it makes sure that your records are safe and secure.
7. External Auditors
If you have worked for a big company, you know that external auditors are primarily commissioned to review the financial statements of your company and to determine whether such statements reflect its true financial position and condition.
External Auditors perform similar functions when they work with a mutual fund company.
And if you are still doubtful of the result, you can even hire your own auditors and review the entire financial statements. As an investor in the fund, you have the very right to do that.
So there you have it folks, Pera Tree’s crash course on Mutual Fund Investing in the Philippines. If there are some important points that you have take from this article, keep these things in mind:
- A Mutual Fund is a corporation; an open-end investment company that can issue unlimited number of shares to the investing public.
- To invest in a mutual fund, you purchase common shares of the corporation. Effectively, that also makes you a part-owner of the company. You enjoy the Shareholder Rights.
- There are several parties involved in protecting a mutual fund investors from fraud and deceit. They include: the SEC itself, custodian bank, transfer agent (also a bank) and external auditors.
A Bonus Topic: How to Redeem Your Mutual Fund Shares
In other words, how do you take your money out from the fund?
When you invest, you subscribe shares of the fund. And that’s easy, as we have already shown.
When you get your money back and cash out, you redeem your shares. That should be easy, also. Redemption can be either be partial or full, but the process is the same:
- You fill out a Redemption Request Form and submit it to the mutual fund company. This is like filling out a Withdrawal Slip in a bank.
- You wait for your money usually in the form of check, but you can also have it directly deposited in your own local bank account. The Law says you should be able to have your money within 7 banking days, but most mutual funds in the Philippines can give it to you within 1 or 2 days!
That’s how liquid your investment is. There is no need for you to sell your shares to anyone. The Mutual Fund stands ready to buy your shares. That’s how Mutual Funds are setup according to the Law.