Mutual Fund 101:
What is a Mutual Fund?
A Mutual Fund is an investment company that pools the funds of many individual and institutional investors to form a massive asset base. The assets are then entrusted to a full time professional fund manager who develops and maintains a diversified portfolio of security investments. People who buy shares of a mutual fund are its owners or shareholders. Their purchases provide the money for a mutual fund to buy securities such as stocks and bonds. A mutual can make money from its securities investments in two ways: a security can pay dividends and interest to the fund, or a security can rise in value. The fund passes any dividends, interest or profits on the sale of its portfolio securities, less fund expenses, to shareholders in the form of distributions.
Why invest in a Mutual Fund?
Interest rates can be volatile and passive short-term investing can erode investment values due to inflation. On the other hand, the stock market has historically outperformed both short and long-term bank deposit rates. Unfortunately, not so many people are familiar with active financial management and effective diversification. Through mutual funds, even investors with limited resources can participate in combinations of these high-yielding investment instruments without the headache of personally selecting and monitoring a portfolio.
Mutual funds are ideal vehicles for growing money over time. It can be used as a savings medium for retirement, education for a child, or building up a long-term cash fund for some specific future financial objective. While largely thought of as a retail financial product, mutual funds are also ideal instruments to augment the yields generated by organizational funds and enhance their level of diversification. Mutual funds have been popular investments for pension and trust programs, other employee benefit funding objectives, and institutional asset-liability matching.
Different Funds,
Different Features
There are currently EIGHT (8) types of Mutual Funds.
Stock or Equity Fund
Refers to an Investment Company with the objective to invest predominantly in or hold equity instruments.
Index Fund
Refers to an Investment Company with an objective of providing investors with a return that replicates or is linked to securities indices as disclosed in its prospectus.
Balanced Fund
Refers to an Investment Company that invests in both equity and fixed income instruments. The respective investments in either equity or fixed income shall not be less than thirty five percent (35%) but not more than sixty five percent (65%) of the NAV of the Investment Company.
Bond Fund or Fixed Income Fund
Refers to an Investment Company which invests in fixed income instruments such as bonds, treasury bills, certificates of deposit, promissory notes, bills of exchange, debentures, etc. It should not invest in shares, except redeemable preferred shares, or share warrants.
Money market Fund
Refers to an Investment Company that invests in short-term fixed income securities with a portfolio duration of one (1) year or less.
Feeder Fund
Refers to an MFC that invests at least ninety percent (90%) of its net assets in a single CIS established by another Fund Manager, asset management company or fund operator, which shall not be a feeder fund.
Fund-of-Funds
Refers to an MFC that invests at least fifty percent (50%) of its net assets in more than one (1) CIS established by another Fund Manager/s, asset management company/ies or fund operator/s.
Multi-asset/Asset Allocation Fund
Refers to an MFC that invests in a fixed or variable mix of both equity and fixed income instruments, as well as cash and cash-equivalents.
Mutual Funds in the Philippines
In the new ICA-IRR, Mutual Fund companies are already allowed to issue Shares and Units. As of February 20, 2024, PIFA has a total of 70 member-funds, broken down as follows:
Equity Funds (Php)
16
Equity Funds (USD)
2
Exchange Traded Fund (Php)
1
Index Funds (Php)
6
Balanced Funds (Php)
13
Balanced Funds (USD)
4
Bond Funds (Php)
11
Bond Funds (USD)
8
Money Market Funds (Php)
4
Money Market Funds (USD)
1
Feeder Funds (Php)
2
Feeder Funds (USD)
1
Total
69
Advantages in Investing in a Mutual Fund
Mutual funds provide a combination of benefits to investors which cannot be matched by other investment instruments. These advantages are as follows:
01
Professional Management
One of the main attractions of mutual funds is that it affords its investors, particularly the small ones, the services of full-time professional managers whose job is to analyze the various investment products available in the market and select those that would give the best possible returns to the fund and its shareholders.
02
Low Capital Requirement
Direct investments usually require substantial capital. The minimum investment amounts for Treasury Bills and commercial paper, for instance, range from Php100,000 to Php1 million depending on the bank or investment house you are dealing with. This also holds true for stocks because while an investor may be able to buy one “lot” (shares are sold in board lots of 10 to 1 million shares depending on the price at which these shares are traded) for as low as Php1,000 to Php5,000, he may not find a stockbroker who will service his account because they prefer to deal with high net worth individuals (rich people in layman’s terms) or at least with people who have substantially more than just Php5,000.00 to invest. In contrast, most mutual funds in the Philippines require a minimum initial investment amount of only Php5,000.00 and minimum additional investments of Php1,000.00. Some Funds even offer lower minimum initial investment.
03
Diversification
There is a saying that goes, “Do not put all your eggs in one basket.” This adage is especially true in the world of investments which is full of uncertainties. There is no such thing as a “sure” thing. An important investment principle that requires holding several securities to reduce the risks associated with investing in individual securities is called diversification. When people invest in a mutual fund, they achieve instant diversification because the fund is usually invested in a wide array of securities.
04
Liquidity
Liquidity is the ability to readily convert investments into cash. Other investment products require investors to find a buyer so that he can liquidate his investment. That is not the case with mutual fund shares because the fund itself stands ready to buy back these shares at the prevailing Net Asset Value Per Share. While the law provides that redemption proceeds must be given within seven (7) banking days from the date of the redemption request, most funds are able to pay the redemption proceeds within a day. Mutual funds are, therefore, considered very liquid investments.
05
Safety
Safety is a very important consideration for most investors. Sometimes even more important than potential returns (well… on second thought, maybe not). Nevertheless, mutual funds are highly regulated by the Securities and Exchange Commission under the Investment Company Act and its implementing rules. They are prohibited from investing in particular investment products and engaging in certain transactions (this is discussed in greater detail in a latter section). They also have to submit regular reports to the SEC as well as to their shareholders. As mentioned earlier, all of the fund’s assets must be held by a custodian bank for a safekeeping.
06
Potential Higher Returns
Because a mutual fund is managed as a single portfolio, it is able to take advantage of certain economies of scale. For instance, with its millions under management, it can negotiate for lower stockbrokerage fees or command higher interest rates on fixed-income investments. In the end, however, it is still the investment adviser who really makes the big difference between making direct investments and investing in mutual funds because very few individual investors can match the experience and skill of full-time professional fund managers.
07
Convenience
In other countries, mutual funds can be purchased directly from a funds or through a broker, financial planner, bank or insurance agent, by mail, over the phone and increasingly over the internet. The popularity of mutual funds in the Philippines is fast catching up. It may be a matter of time for this level of convenience to be a reality in the country. Funds also offer a variety of other services, including monthly or quarterly account statements, tax information, and 24-hour phone and computer access to fund and account information.
Investment Restrictions for Philippine Mutual Fund
01
Mutual funds may not invest in any of the following:
- Margin purchase of securities (investments in partially paid shares excluded)
- Commodity futures contracts
- Precious Metals
- Unlimited liability investments
- Short selling of currencies
- Short selling of investments
- Other investments as prescribed by the SEC
02
Mutual funds are not allowed to incur any debt or borrowing unless at the time of the occurrence there is asset coverage of at least 300%.
03
Investment companies cannot undertake in an underwriting or selling group in connection with the public distribution of securities except for its own capital stock.
04
Funds cannot make any investment for the purpose of exercising control of management.
05
The maximum investment any fund in any single enterprise shall not exceed ten percent (10%) of the fund's net asset value except obligations of the Philippine government or its instrumentalities. Provided, that in no case shall the total investment of the fund exceed ten percent (10%) of the outstanding securities of any investee company.
06
For liquidity purposes, at least 10% of all funds shall be invested in liquid/semi-liquid assets such as Treasury notes or bills, BSP Certificates of Indebtedness, and other government securities or bonds. Savings and time deposits with any government or commercial bank, provided that in no case shall such savings or time deposits be accepted or allowed under a “bearer”, “numbered” account or similar arrangements.
07
The investment of funds in real estate properties shall not exceed 25% of the total investment portfolio.
08
Funds cannot engage in lending operations without prior approval of its Board of Directors. Such approval shall be limited only to corporations or other entities, private or public, determined to be financially sound by the Board.
FAQs
A Mutual Fund is an investment company that pools the funds of many individual and institutional investors to form a massive asset base. The assets are then entrusted to a full time professional fund manager who develops and maintains a diversified portfolio of security investments. People who buy shares/units of a mutual fund are its owners or shareholders/unitholders. Their purchases provide the money for a mutual fund to buy securities such as stocks and bonds. A mutual fund can make money from its securities investments in two ways: a security can pay dividends and interest to the fund, or a security can rise in value. The fund passes any dividends, interest or profits on the sale of its portfolio securities, less fund expenses, to shareholders/unitholders in the form of distributions.
A Fund Manager is a registered entity with an Investment Company Adviser license that is engaged in the business of managing the daily operations of an Investment Company in the investment, administration and accounting of fund assets and the monitoring of the activities of third party service providers such as custodian, transfer agent, and distributors.
NAV or Net Asset Value refers to the aggregate value of each fund, either shares or units, as determined by the market value of its underlying securities holdings, including any cash in the portfolio less liabilities, computed at the close of the trading of securities for the day.
NAVPS or Net Asset Value per Share refers to the computed NAV on a per share basis at the close of the day. It is calculated by dividing the Investment Company’s total net assets from the shares outstanding.
NAVPU or Net Asset Value per Unit refers to an exchange, government securities market or an over-the-counter market that is regulated by the relevant competent regulatory authority and where financial instruments are regularly traded. It shall be of good repute and open to the public or a substantial number of market participants.