Discover right in this page an investment vehicle that some of the richest families in the Philippines are using to keep themselves even richer each and every year — without lifting a finger to do the actual work, nor even becoming a super-genius to do it.
Their secret is simple: Mutual Funds!
Well, it’s not really secret at all. Mutual Funds were available in the Philippines since 1980’s. Yet this type of investment instrument is virtually unknown to the common Filipinos.
In your case, that is going to change. You have probably landed to this web page because you wanted to know what a mutual fund is, or how you can invest in it, or how you can use it achieve your financial goals — for yourself, for your family, or for your children.
You see, the fact that you are searching for that kind of information indicates that you are already way ahead of your peers in terms of financial consciousness. Apparently, you want to do something to improve your current financial situation so that the future could perhaps be better.
Take time to carefully understand this investment and you’ll set yourself up for financial success in the future.
First, allow me to dispel some myths about mutual funds which I commonly encounter from people who don’t know what it is.
The Financial Blindess Among Filipinos
It is very unfortunate that a lot of Filipinos have no idea what a Mutual Fund is or how they can benefit from this type of investment vehicle.
As a Mutual Fund Advisor (click here to view my SEC License), it’s been my personal experience that when I mention the term “Mutual Fund” to someone I know, or even encourage a friend to invest in it, I’m always appalled by the varied reactions that I get, some of which I list below.
1. They think it’s just another Network Marketing, Pyramiding, or Get-Rich-Quick Scheme that I want to offer to them.
It’s as if, I’ve already scammed them in the past and here I am about to do it again.
Apparently, this is a blatant display of financial ignorance.
Just for the record: I’ve never scammed anybody in my whole life. That will never happen, even if I live the life of a paupper. My values are still intact and my conscience won’t allow me to do it.
2. They think they will be parting with their money. That someone will take that money from their pocket and put that money into my wallet.
Oh, my… That rob-Peter-to-pay-Paul kind of transaction is just not my style. My standards are so much higher than that.
3. They think it’s too complicated to understand, so they better stick with old and clunky Time Deposit Account even if their money is just earning 1% or less annually.
(They don’t even know that the inflation is at 3%.) “Better safe than sorry” remains their dogmatic financial philosophy.
To be honest, it’s this last group of people to whom I am motivated to write this article.
Personally, I think the first two groups are already hopeless. Unless a miracle happens to them, you can’t force them to learn something new. Some people are just contented with being ignorant. I hope that’s not you.
I believe that if someone can just show them that there is a better way, they’ll be awakened from their financial sleep and they’ll do everything in their capacity to take control of their finances.
Who in his right mind would just allow his money to gather some dust in the bank?
Though I’ve written about Mutual Funds several times already in different articles of this website, I wanted to distill the idea into one accessible page and make it easier for beginners to understand.
So without further ado, let’s move on to the main topic.
Mutual Fund Defined
I’ve asked Google for the definition of a mutual fund — since this concept is well known throughout the world and the Philippines is just picking up in the recent years – Google spit out with this answer:
That’s valid, but not very helpful to a beginner, I think.
So instead of giving you another single-statement definition of the term, I would list down some of its most important characteristics and attributes. From there you should be able to put the pieces and assemble in your mind a thorough understanding of the concept.
Here we go, the three concepts you need to know about mutual funds.
Concept #1: A mutual fund is an investment company structured as a business corporation and managed by a Fund Manager.
In the Philippines, a corporation is a legal entity owned by its shareholders.
With respect to the family of mutual funds under the management of the First Metro Asset Management Inc (FAMI), here are the business names of the three most popular mutual funds they handle:
- First Metro Save and Learn Equity Fund, Inc.
- First Metro Save and Learn Fixed-Income Fund, Inc.
- First Metro Save and Learn Balanced Fund, Inc.
Don’t forget this part: The fund’s investors are also its shareholders. It follows, therefore, that investors are also the owners of the fund.
As an owner-investor of a mutual fund, you share in the income, expenses, profits and losses of that company. This is the most important concept that you have to bear in mind.
Concept #2: A Mutual Fund is a pooled investment money coming from many investors with a common financial goal.
Collectively, this money is in turn invested in a diversified portfolio of securities such as common stocks, preferred stocks, corportate bonds, Treasury Bills, commercial papers, etc.
In other words, a mutual fund’s main business is to invest in securities. That is why they are categorised by the Securities and Exchange Commission as investment companies. They don’t directly sell or manufacture products or render services like usual businesses do.
A mutual fund company, therefore, derives its profits (and also losses) from its undelying investments.
A Stock Mutual Fund like the FAMI Save and Learn Equity Fund (SALEF), for example, primarily invests 90% of its asset to Common Stocks from carefully selected companies listed in the Philippine Stock Exchange; the other 10% is invested in bonds and cash equivalents. That is to say, SALEF earns through:
- Dividends from common stocks.
- Interests from bonds and other debt instruments.
- Capital gains when stocks and bonds are traded.
Whatever the fund earns from its various investments, it passes the profits back to investors-owners.
Question for you: What kind of income does a Bond Fund (such as the Save and Learn Fixed-Income Fund) derive from its investments?
Concept #3: A Mutual Fund is guided by an investment philosophy or objective.
Just because they have the money lying around and ready to be invested doesn’t mean that the fund manager is free to use that money and invest it as he pleases and put it into anything under the sun.
The fund investors would be terribly mad and kick-out that manager out of his job.
Below is a list of the Save and Learn series of mutual funds and their respective investment objectives as specified in their prospectus.
Save and Learn Equity Fund — The Fund is designed to seek long-term capital appreciation by investing primarily in carefully selected listed and non-listed equity securities.
Save and Learn Fixed-Income Fund — The Fund seeks to provide as high a level of current income as is consistent with the preservation of capital and liquidity.
Save and Learn Balanced Fund — The Fund seeks to provide total return consisting of as high a level of current income as is consistent with the preservation of capital and liquidity and long-term capital appreciation by investing in a mix of debt instruments and equity securities.
The job of the Fund Manager is to manage the fund and determine the right allocation of assets that would allow the fund to meet its investment objective.
Your job as an investor is to determine your own objective and then match that with the fund’s objective. For example, if you want to setup a College Fund that will be worth P 1.5 M in 10 years time, you might want to pick the Save and Learn Equity Fund to meet that goal knowing that it is the fund that will give you the best bang for your money over that long period of time.
What are the uses of Mutual Funds?
Financially savvy investors are using mutual funds as investment vehicle to address different financial goals that they want to achieve.
Here are the most common ones:
- Retirement Funding
- Education Funds for their children
- Lifestyle Planning
- Estate Planning
Institutional Investors (companies, organizations, etc) are also using mutual funds for various financial objectives such as the following:
- Asset-Liability Matching
- Employee Retirement Funding
- Employee Retention Program
- Diversification of Investments
See? Rich, poor, or anyone else who is aiming to achieve a certain financial goal can use mutual funds to meet that goal.
Some folks they just don’t have any idea yet about this investment vehicle.
Not you! Consider yourself lucky if you have read this far. You are already way ahead of your friends who are still financially blind about investing.
Now that you know, it’s time to take some action.
The sooner you start investing, the better chances you have for growing your money. Time is the most important component when it comes to investing.