For the longest time, I’ve been thinking about writing this guide because mutual funds are a good passive income option but they’re not well understood. And when you’re lucky enough to attend free seminars that are provided by investment houses and financial institutions, you could learn so much about financial planning.
In this article, I will discuss mutual funds in general, a few fast facts, their benefits, disadvantages, and a guide on getting started.
Table of Contents
What is a mutual fund?
A mutual fund is a pool of money from the public that is invested with an expectation of a profit. Because of the way it invites people to invest, it is also called pooled or managed fund. The money that is gathered is used to buy and sell (trade) securities. Securities are assets that have the potential to grow such as stocks or bonds.
A stock represents part-ownership of companies such as PLDT, Ayala, SM, Jollibee, etc., and it can be bought or sold on the Philippine Stock Exchange. By investing, you can actually share in the potential earnings of the Philippines’ biggest corporations.
A bond meanwhile is proof of debt. The debtor, which might either be the Philippine government or companies, pays interest regularly and settles the debt in full when it matures.
What is a Fund Manager?
So if there is a need to buy and sell stocks and bonds, who does the trading? It’s the fund manager that does all that. Fund managers are experts in securities and they will do the trading on behalf of all the investors. In exchange, investors pay annual fees and other charges to cover the operation of the fund.
What is the Investment Objective?
Fund managers however cannot trade just any way they like. They are bound to follow the investment objective found in the prospectus.
What is a Prospectus?
A prospectus is a document that shares information about the investment, its objective, risks, costs, shares being offered, and other policies.
So for an example, a bond fund can only purchase bonds. It is not allowed to hold stocks. Likewise, a stock fund may be limited to buying only stocks that are traded on the Philippine Stock Exchange.
Earnings of Mutual Funds
They earn depending on securities that they have invested in. A bond fund can earn from interest. Remember that a bond is proof of debt and it works just like any other debt where you receive interest when you lend someone money.
When it buys stocks, the fund earns in two ways: dividends and stock price gains. Dividends are a part of the earnings of companies that they decide to give to their stockholders.
Mutual fund shares
A mutual fund is itself a company and all investors are shareholders of the company. Upon investing, you become one of its owners and you obtain rights and privileges such as getting invited to the annual shareholders’ meeting, being entitled to vote, etc.
Most importantly, a number of shares that correspond to the amount you’ve invested is going to be issued to you.
Net asset value per share
But how many shares will you receive? This is where the net asset value per share or NAVPS comes in. The NAVPS is the total worth of the entire mutual fund company divided by the number of shares it has distributed to all investors. It is determined by getting the sum of all its assets minus all debts and expenses and then divided by the number of shares.
So for example sometime in 2017, I invested ₱5,000 in a stock fund. At that time, each share of the fund was valued at ₱0.8115. This is its net asset value per share (NAVPS). So 6,161 shares were issued to me.
|Price of each share/NAVPS||₱0.8115 per share|
|Total issued shares||6,161|
How to Compute Earnings from a Mutual Fund?
You would earn from the increase in the price of each share. Such increase is caused by the gains derived from all dividends, a rise in the value of its stock portfolio, and/or interests. For example in February 2018, I decided to withdraw. By then, each share rose to ₱0.9606, so the final amount released to me was ₱5,918.26.
That’s an 18.36% return on investment (ROI) on the spare cash that I was saving. Not really bad considering that time deposit gives 1% to 3% interest every year and savings accounts only give 0.25% annually. (Okay, I received so many questions. I closed my account because I was transferring to another fund with a different objective. And yes, all stock funds must be long-term so what I did was really not advisable.)
|Total issued shares||6,161|
|Price per share/NAVPS||₱0.9606|
Where can You Check the NAVPS of all Mutual Funds?
You can visit the website of the Philippine Investment Fund Association. There, you can see the net asset value per share of all mutual funds that are PIFA members. The figures won’t show up on days when the stock market is closed such as weekends and holidays.
As you can see below, the information provided by PIFA is very detailed. It allows you to see at a glance the gains/losses of all member funds.
To better understand the image, here is a brief explanation of the PIFA table.
- NAVPS/NAVPU stands for net asset value per share or net asset value per unit. It is what each stock or unit would cost should you invest you want to invest.
- 1 year return provides the gain/loss the most recent and past NAVPS/NAVPU of at least 365 days.
- 3 year return shows the return of the fund for the past 3 years.
- 5 year return gives you the return of the fund for the past 5 years.
- YTD return means year-to-date. It shows gain/loss beginning from the first trading day of January of the current year up to the most recent day with a published NAVPS/NAVPU.
Differences Between Mutual Fund and UITF
They’re actually both investments. Their differences lie in the way they are operated and regulated.
|FACTORS||MUTUAL FUND||UNIT-INVESTMENT TRUST FUND|
|Who offers||Investment companies||Banks|
|Who sells||SEC-licensed advisors||Bank employees|
|What you buy||Shares of mutual fund||Units of participation|
|Pricing||Net Asset Value Per Share (NAVPS)||Net Asset Value Per Unit (NAVPU)|
|Who regulates||Securities and Exchange Commission||Bangko Sentral ng Pilipinas|
|Which law governs managed funds||Republic Act 2629 – Investment Company Act of the Philippines||Republic Act 8791 – General Banking Law|
Benefits of mutual fund
There are many advantages when you start investing.
You can open an account with ₱5,000. Other companies may even allow you to start for as low as ₱1,000. If you buy bonds directly, you’d be required to put up at least 50K or more. Purchasing stocks directly would also require you to buy them in a tranche called board lot. This means, you can’t buy just one stock but a minimum number of shares.
You earn passive income, and the potential gain can be even higher than savings accounts or time deposits. There is no need to get involved in the fund’s operation. At the same time, you get to enjoy the opportunity to earn extra from the increase of value in your investments. This is especially good when you’re saving up for long-term goals such as purchasing a property.
Trust Fund for Your kids
Are you saving up for your kids? Then you can actually request that your account be made “in trust for” or ITF. An ITF would transfer the ownership of the investment to your kids when they reach 18 years old, the age of maturity.
All earnings of the fund are not taxed pursuant to the regulations set forth by Republic Act 8424.
Do you need to withdraw because of an emergency? You can actually do that at any point (terms apply). They are required by law to allow redemption of shares—that is, to buy back the shares issued to you—within 7 days.
Take advantage of the expertise of fund managers as they work to maximize the growth of the fund. There’s no need to understand the inner workings of stock exchanges, analyze financial reports of companies, or determine the value of bonds. All of that would be done by the fund managers.
They are also very flexible. Investment companies usually operate multiple funds and so it is easy to transfer from one account to another. This is actually good whenever you are switching strategies, have different objectives in mind, or adapting to a developing situation such as a recession.
Don’t put all your eggs in one basket. When you become part of the fund, you are invested by default into its portfolio of assets that may span across industries. By diversifying, you can reduce the risks of having a low return especially when an individual company or industry experiences a slowdown.
Benefiting from our developing economy
A lot of people think that only the rich get richer and that’s because they are not taking part in the growth story of our country. By buying shares from the Philippines’ biggest conglomerates through an investment fund, you can be part of their earnings. As the economy grows, your net worth can grow too.
Safe and transparent
They are considered safe due to the level of scrutiny and involvement of the Philippine government. Their operations can only start after they get a special SEC license called a secondary license.
All corporations get a primary license. It is a simple business permit where SEC confirms that it is a corporation. That’s just it. Companies that solicit investment from the public, such as mutual funds, need to get a secondary license as covered in Republic Act No. 8799. (As an aside, this is actually how you can tell if a company is an investment scam or not. Aman Futures allegedly duped ₱12 billion in the Visayas and Mindanao operated without the secondary license.)
Potential higher returns
They have advantages that direct investors don’t have. Due to the huge amount of assets they manage, they can negotiate lower fees from brokers and higher interests. They’re also uniquely positioned in the financial industry, possessing expertise and skills that an individual investor may not have.
Managing your investment is like having a bank account. It’s been made very convenient. Depending on where you are, brokers, agents, advisers, and reps are easy to get in touch with. Branches are also located in major cities. There are financial seminars being offered to continue spreading financial literacy.
And once you have opened an account, it’s easy to manage because of the availability of support on transactions like buying shares, redeeming them, or transferring them through phone, email, or website. I know this for a fact as I have seen many of them moving towards online access through the years. You can even set up an auto-debit so that your salary gets deducted and credited to your account.
Disadvantages of mutual fund
Before you make a decision, it is important that you also understand the disadvantages.
- Location. The investment company may not have a branch near you. It can be a concern if you want to speak with a representative in person. However, it shouldn’t be a concern if you’re used to dealing with companies online.
- Fees and charges. There are front-end fees and annual charges. You want to check this article for a complete list of fees in mutual funds.
- Lack of control. You are not in control of securities that are acquired or divested. In exchange, you take advantage of the expertise of fund managers.
- Turnaround time. It may take some time for the redemption of shares and releasing of money. In my experience, it is anywhere between one to three days.
- Unmet expectations. The historical performance of the fund does not guarantee future returns.
- Capital depreciation. When you’re in a stock fund, there’s a risk of capital loss because the market may be slowing down. This risk can be managed by investing long-term.
- Ownership. When you invest, you are a stockholder of the mutual fund, not the individual companies that the fund is composed of.
Types of mutual funds
There are four types of funds that are in the country today:
|Balanced funds||Stocks and bonds||Medium||Moderate|
|Money market funds||Fixed income||Low||Conservative|
- Stock funds are invested in stocks. They’re for aggressive long-term investors as their prices go up or down. The risk for loss of capital is high and the potential for upside gain is likewise high.
- Index funds. The index funds purchase the top 30 companies that compose the stock index. These are also called blue-chip stocks.
- Equities funds. They are invested in stocks and have different goals.
- Bond funds are invested in bonds. They’re for conservative investors who want to preserve their capital. Earnings are limited by interest gained from debt instruments, which are considered safer than stocks.
- Balanced funds are invested in a mix of bonds and stocks. They’re for people who want to have earned the potential gains from stocks but seek the relative safety of bonds.
- Money market funds are invested in short-term retail treasury bonds, treasury bills, and bank deposits. They are also considered safe securities because they have low risks but also low potential returns.
Top 10 best mutual funds in the Philippines for 2020
To better help you decide, here are the top 10 mutual funds in the country in 2020 and 1-year ROI (return on investment). Data is updated until December 29, 2020. Just a note though that actual past returns of all funds are not a guarantee of their later performance.
|CURRENCY||TYPE||FUND NAME||1YR. RETURN(%)|
|Dollar||Equity||Sun Life Prosperity World Voyager Fund||21.75%|
|Dollar||Equity||ATRAM AsiaPlus Equity Fund||15.85%|
|Dollar||Balanced||Sun Life Prosperity Dollar Advantage Fund||15.59%|
|Dollar||Balanced||PAMI Asia Balanced Fund||10.65%|
|Peso||Bond||Soldivo Bond Fund||8.05%|
|Dollar||Balanced||Sun Life Prosperity Dollar Wellspring Fund||6.65%|
|Peso||Balanced||ATRAM Dynamic Allocation Fund||6.32%|
|Dollar||Bond||ATRAM Total Return Dollar Bond Fund||6.14%|
|Peso||Bond||Philam Bond Fund||5.94%|
|Peso||Bond||Philequity Peso Bond Fund||5.93%|
Thus, for 2020, the best performing mutual fund is Sun Life Prosperity World Voyager Fund, which is dollar-denominated and invested in developed and emerging markets. For the complete list, see the article on the top Philippine mutual funds for 2020.
Here is the summary of the best performing for each category.
- Equity index fund: First Metro Phil. Equity Exchange Traded Fund
- Equities fund: Sun Life Prosperity World Voyager Fund, Inc.
- Balanced fund: Sun Life Prosperity Dollar Advantage Fund, Inc.
- Bond fund: Soldivo Bond Fund, Inc.
- Money market fund: ALFM Money Market Fund
Mutual fund: Equity index fund performance in 2020
|First Metro Phil. Equity Exchange Traded Fund, Inc.||-8.56%|
|Philippine Stock Index Fund Corp.||-8.61%|
|Philequity PSE Index Fund Inc.||-8.81%|
|Sun Life Prosperity Philippine Stock Index Fund, Inc.||-8.84%|
|PAMI Equity Index Fund, Inc.||-9.21%|
|Philequity MSCI Philippine Index Fund, Inc.||-10.96%|
|First Metro Save and Learn Philippine Index Fund, Inc.||-11.39%|
Mutual fund: Equity fund performance in 2020
|Sun Life Prosperity World Voyager Fund, Inc.||Dollar||21.75%|
|ATRAM AsiaPlus Equity Fund, Inc.||Dollar||15.85%|
|Philequity Alpha One Fund, Inc.||Peso||5.38%|
|MBG Equity Investment Fund, Inc.||Peso||-2.60%|
|ATRAM Alpha Opportunity Fund, Inc.||Peso||-5.03%|
|First Metro Save and Learn Equity Fund, Inc.||Peso||-7.72%|
|Philam Strategic Growth Fund, Inc.||Peso||-8.76%|
|Philequity Fund, Inc.||Peso||-9.07%|
|United Fund, Inc.||Peso||-9.66%|
|Philequity Dividend Yield Fund, Inc.||Peso||-10.02%|
|ALFM Growth Fund, Inc.||Peso||-10.37%|
|Climbs Share Capital Equity Investment Fund Corp.||Peso||-11.30%|
|First Metro Consumer Fund on MSCI Phils.||Peso||-13.08%|
|Sun Life Prosperity Philippine Equity Fund, Inc.||Peso||-14.40%|
|ATRAM Philippine Equity Opportunity Fund, Inc.||Peso||-15.35%|
|Soldivo Strategic Growth Fund, Inc.||Peso||-15.93%|
Mutual fund: Balanced fund performance in 2020
|Sun Life Prosperity Dollar Advantage Fund, Inc.||Dollar||15.59%|
|PAMI Asia Balanced Fund, Inc.||Dollar||10.65%|
|Sun Life Prosperity Dollar Wellspring Fund, Inc.||Dollar||6.65%|
|ATRAM Dynamic Allocation Fund, Inc.||Peso||6.32%|
|ATRAM Philippine Balanced Fund, Inc.||Peso||4.24%|
|Cocolife Dollar Fund Builder, Inc.||Dollar||2.54%|
|Sun Life Prosperity Achiever Fund 2028, Inc.||Peso||0.33%|
|NCM Mutual Fund of the Phils.||Peso||0.05%|
|PAMI Horizon Fund, Inc.||Peso||-0.39%|
|First Metro Save and Learn Balanced Fund Inc.||Peso||-0.49%|
|Philam Fund, Inc.||Peso||-0.52%|
|ALFM Global Multi-Asset Income Fund Inc.||Dollar||-1.01%|
|Solidaritas Fund, Inc.||Peso||-1.97%|
|Sun Life Prosperity Achiever Fund 2038, Inc.||Peso||-5.14%|
|Sun Life Prosperity Achiever Fund 2048, Inc.||Peso||-6.48%|
|Sun Life of Canada Prosperity Balanced Fund, Inc.||Peso||-8.02%|
|Sun Life Prosperity Dynamic Fund, Inc.||Peso||-9.34%|
|First Metro Save and Learn Fund||Peso||-13.89%|
Mutual fund: Bond fund performance in 2020
|Soldivo Bond Fund, Inc.||Peso||8.05%|
|ATRAM Total Return Dollar Bond Fund, Inc.||Dollar||6.14%|
|Philam Bond Fund, Inc.||Peso||5.94%|
|Philequity Peso Bond Fund, Inc.||Peso||5.93%|
|Philam Dollar Bond Fund, Inc.||Dollar||5.50%|
|Philam Managed Income Fund, Inc.||Peso||5.15%|
|Sun Life of Canada Prosperity Bond Fund, Inc.||Peso||4.07%|
|First Metro Save and Learn Fixed Income Fund,Inc.||Peso||3.98%|
|ALFM Peso Bond Fund, Inc.||Peso||3.69%|
|Philequity Dollar Income Fund Inc.||Dollar||3.42%|
|ALFM Dollar Bond Fund, Inc.||Dollar||3.37%|
|Ekklesia Mutual Fund Inc.||Peso||3.27%|
|Cocolife Fixed Income Fund, Inc.||Peso||3.20%|
|Sun Life Prosperity GS Fund, Inc.||Peso||3.11%|
|First Metro Save and Learn Dollar Bond Fund, Inc.||Dollar||3.10%|
|Sun Life Prosperity Dollar Abundance Fund, Inc.||Dollar||1.60%|
|PAMI Global Bond Fund, Inc.||Dollar||-0.01%|
|ATRAM Corporate Bond Fund, Inc.||Peso||-0.07%|
|ALFM Euro Bond Fund, Inc.||Euro||-0.25%|
Mutual fund: Money market performance in 2020
|ALFM Money Market Fund, Inc.||Peso||3.20%|
|Sun Life Prosperity Money Market Fund, Inc.||Peso||2.56%|
|First Metro Save and Learn Money Market Fund, Inc.||Peso||1.76%|
|Sun Life Prosperity Dollar Starter Fund, Inc.||Dollar||1.48%|
Getting started with mutual funds
When you open an account, here are a few things to take note of.
|Initial investment||₱1,000 – ₱5,000|
|Additional investment||₱500 – ₱1,000|
|Front-end fee||0 – 2%|
|Exit fee||0% – 1%|
|Management fee||1% – 3%|
|Value||Net asset value per share|
|Securities||Stocks or bonds or money market|
- The initial investment is the lowest amount of money that you can start to open an account.
- Additional investment is the lowest amount you can add to your investments. You can go higher and you can re-invest as often as you like.
- Front-end fee, also called sales load, is the percentage of your investment that goes to the company as a fee.
- Management fee is an annual charge for the operation of the fund such as paying salary for the fund manager, brokerage fees, etc.
- Exit fee is only charged if you withdraw within the first few months.
- Investment value is determined by NAVPS or net asset value per share, which is the worth of each share of the fund that is issued to investors. Its value is computed by adding all of the fund’s assets minus debts and the result is divided by the number of shares.
- Proof of your ownership is through shares issued to you. The number of shares you hold depends on your investment and the NAVPS at the time of purchase. (If you invested ₱5K and the NAVPS is ₱2, then you have 2,500 shares).
- Securities are the assets of the fund such as stocks, bonds, or money market. They are determined by the investment objective.
- Earnings are not taxable.
Can I trust mutual funds?
The answer is a big YES. I’ve come to know about them a few years back from a friend who used to work with a local branch of a large mutual fund company.
They are also very highly regulated by the Philippine government through the Securities and Exchange Commission (SEC). They are required to comply with the laws, rules, and regulations. They are asked to regularly send reports and documents to the government and to the investors. Failure to do so usually means penalties, and they might even have their licenses revoked and their operations suspended.
The SEC is the government watchdog on all mutual fund companies.
How do I check if the mutual fund is legit?
Well, the first company that I reached out to was actually a sister company of Metrobank. I knew Metrobank as well as anyone, so I knew that it could be trusted from the get-go.
So how can you check if the mutual fund companies they’re legit? Almost all of them are members of the Philippine Investment Fund Association (PIFA). Secondly, they must be registered with SEC (primary license) and allowed to solicit investments (secondary license). Here are a few steps that you can do.
- Check the complete list of mutual funds registered with the Philippine government.
- Check the official list of mutual funds from the SEC.
- Check the PIFA’s list of member companies on their website.
- Reach out to the SEC’s Enforcement and Investor Protection Department by either calling or sending them an email. Their response may take some time.
- Visit their website.
- Is it a sister company of another well-known company? Like FAMI with Metrobank, ALFM with BPI, Philequity with Vantage Equities Inc., etc.
Frequently asked questions about mutual funds
Below are some of the commonly asked questions regarding mutual funds. They can come in handy when you’re about to invest. You can always send a message on the contact page for any more inquiries.
Can I invest in more than one fund?
Yes, you may open multiple mutual funds. For your convenience, see if you can do so by dealing with only one investment company. In that way, transactions can be done in one go.
Are all mutual funds the same?
No, they’re not. They differ in many aspects including the securities it holds, initial investment, additional investment, fees, goals, and benchmarks.
Does my mutual fund mature?
There is actually no maturity involved. You can go in and get out any time you want. Note though that fees may be charged when you redeem shares within the holding period. It’s convenient in the way that there is no contract involved.
How do I know where it is invested?
You can always reach out to the company. The portfolio can also be viewed on their website. Upon starting, brochures, forms, and other files will be presented to you describing the assets the fund contains.
At what price can the mutual fund shares be purchased?
The price is determined by the NAVPS or net asset value per share. It is computed by the value of all assets minus debts and then divided by the number of all issued shares.
When is UITF NAVPS calculated?
NAVPS is usually computed at the end of each trading day except on weekends and holidays. So when you invest, the number of shares that will be issued to you would depend on the NAVPS of the previous day.
How do I redeem my shares?
You can redeem your shares by requesting that you would want to get your money back. Check with the company on the procedures by either contacting them online or talking to a rep.
How much do I get when the investment is redeemed?
It depends on the number of shares you have and the NAVPS at the time of your redemption. Simply multiply the shares with the NAVPS, and you should have an idea on how much you’re going to receive.
How do I compute my mutual fund earnings?
To check whether you’ve gained or lost, you need to know the NAVPS at the time the shares were purchased and the NAVPS at which they were redeemed. The formula is (NAVPS redeemed – NAVPS purchased) ÷ number of shares.
Are mutual funds guaranteed or insured?
No, they are not guaranteed and they are also not insured. They are not deposited products where interest earned can be predictable. Nor are they insured by the Philippine Deposit Insurance Corporation. Investors get to receive all gains and losses.
Can I lose money in a mutual fund?
Yes. As mentioned above, the income that you get is not guaranteed. It depends on the market that you’ve invested in, so there is a risk of capital loss. The fund manager is responsible for maximizing returns and mitigating the risks. S/He can be removed by the shareholders in the case where performance is considered poor.
Can I tell the fund manager what to buy or sell?
No. The fund manager is going to follow the objective laid out in the prospectus. In return, they are compensated through the management fees.
Is my money safe in mutual funds? Will the fund manager run away with my money?
Mutual funds are highly regulated by the government. They are also established with protecting the interest of investors in mind. The fund manager does not have direct access to the assets, which are held by a custodian bank. The custodian bank is forbidden from making decisions on these assets.