So you want to invest in a mutual fund right here in the Philippines?
Here’s the first thing you should know: To invest in a Mutual Fund means to buy common shares of the investment corporation.
The Investment Company Institute (ICI) defines Mutual Fund as “a company that invests in a diversified portfolio of securities.” It then went on to say, “People who buy shares of a mutual fund are its owners or shareholders. Their investments provide the money for a mutual fund to buy securities such as stocks and bonds.”
In other words, as a mutual fund investor, you are also a part owner of that company. This feels great the first time you do it, like a new financial start in one of those HSBC promotions. As such, you get the following goodies:
- You are entitled to dividends, proportionate to your shareholdings in the corporation.
- You share in the profits and the losses of the company.
- You have voting rights.
- You can examine and question the books of accounts of the company.
- You receive a proportionate share of the company’s asset when the business is liquidated.
Well, these rights may not be all important to you. You simply want to grow your money, right?
The point is, investing in a mutual fund is very different from investing is fixed-income securities which you may already be familiar with — Time Deposit, T-Bills, BSP’s Special Deposit Account, etc. And it is very important that you are aware of these differences.
Investor As Part-Owner
For one more time, I hope to hammer down this concept of “investor as part-owner” by the following illustrative Q & A statements:
Q: What do they call you when you put money in a bank.
Q: Are you a part-owner of the bank by virtues of being its depositor?
Q: What do they call you when you put money in a mutual fund?
Q: Are you a part-owner of the mutual fund by virtue of being its investor?
You will experience this yourself the moment you start investing in a mutual fund.
What Do You Get When you Invest in a Mutual Fund?
Perfect! That’s the right question you should be asking.
So here is the answer: You get shares of common stock in the Mutual Fund.
Each share actually has a price. And that price is determined by a unit called Net Asset Value Per Share (NAVPS).
The price varies each day. One day it’s cheap, the next day it’s expensive. While some days, the price just go flat – meaning there is no price fluctuation. You can monitor the daily price movement from the following sources:
- From Fund Management’s Website.
- From the business newspapers, the following day.
- From Bloomberg (my favorite) and other third-party monitoring sources.
The Securities and Exchange Commission (SEC) actually requires (mandates) every Mutual Fund that operates in the Philippines to compute and disclose their NAVPS at the end of the business day… typically when the Philippine Stock Exchange also closes for business transaction.
In some countries like the US and Canada, they simply call it, Net Asset Value (NAV).
Now if you are still afraid of that jargon, you can simply call it Share Price, because in all honesty, that’s what it is. NAVPS is simply the Price per Share.
Once you know the Share Price, it is now easier to compute for the number of shares you will get once you decide to invest a specific amount.
Let’s consider as an example a hypothetical Mutual Fund whose Share Prices covering the period January 2, 2013 to January 6, 2013 are as follow:
|Month of January 2013||Share Price (PhP / share)|
Assuming you invest P 20,000 in Jan 2, you then get 34 shares.
How is that?
Well, here is the formula and sample computation:
= P 20,000 / ( P 588.50 / share )
= 33.98 shares
= 34 shares (rounded-off to a whole number)
Note: This simple formula is meant for quick illustration only. We ignore things like Front-End Load and Value Added Tax. Most mutual funds in the Philippines have Sales Load – either Front-End or Back-End – but I would discuss more about it in another article.
Buying Shares Question and Answer
Question #1: What happens to the value of your investment the following day, January 3?
Answer to Question #1: I’m sorry to tell you, but your original investment of 20k is now only worth P 19,991.32.
That’s ( 34 shares) x ( P 587.98 / share ) = P 19,991.32.
Should you panic? I hope not.
Question #2: How much is your investment worth in January 5?
Answer to Question #2:
Luckily, the market has been good to you on the 5th of January. Your investment is now worth P 20,032.8!
How that? Follow the same math you’ve learned so far and you’ll get it.
Question #3: How many shares do you have at the end of the January 6?
Answer to Question #3:
Of course, you still have 34 shares in the fund. You have not added nor withdrawn any investment yet. The number of shares you own will increase only if :
- You buy more shares – that is, invest some more.
- Stock Dividends are declared and distributed by the mutual fund company to its shareholders.
As a mutual fund investor, it is very important that you know how many shares you have at any point in time so you can keep track of the value of your investment using third party providers like Bloomberg.
To determine the value of your investment, you simply multiply the Share Price with the number of Shares you own. Mathematically, your investments value is computed as:
It is really that easy.
Fun and simple, right? You don’t have to be an Albert Einstein to invest in a Mutual Fund. In fact, one of the reasons you should go with Mutual Funds instead of directly managing your own portfolio of securities is so that you can eliminate the complexity and hard-work involve in the job.
Once you know how to do this stuff, your next move really involves just two things: monitoring the investment, deciding when to buy and when to sell your shares.