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Mutual funds: pooling money to invest

POSTED ON DECEMBER 16, 2019     Andoy Beltran

For people who find stocks a little too complicated or time-consuming, mutual funds might be a better fit. In these, the money of different investors is pooled together and invested in assets.

A professional fund manager takes care of the research and monitoring. The returns generated by the assets are passed on to the investors through capital appreciation, dividends or both. The exact composition of the mutual funds is of assets that match different risk appetites.

Many kinds available

Money Market Funds contain deposit instruments and bonds that mature in less than one year. These match a low risk appetite, with returns that are relatively higher than a regular savings account.

Bond or Fixed-income Funds have certificates of indebtedness from corporations or the government. Investors make money through both capital appreciation and regular coupon payments.

Balanced Funds are portfolios composed of bonds and stocks. Depending on the fund manager’s strategy and authority, the ratio of bonds to stocks typically ranges from 65:35 to 50:50.

Equity Funds are made of the stocks of publicly listed corporations. Of the different types, Equity Mutual Funds are composed of at least 95% stocks, with the remaining percentage devoted to liquidity purposes (normally invested in money market instruments).

Index Funds are Equity Funds that invest in index stocks. In these, the fund manager follows the composition and weights of specific stocks in an index so the investors will be investing only in index names.

Mutual Funds vs. UITFs

Mutual funds have many similarities with Unit Investment Trust Funds (UITFs), as both combine money from different sources to purchase financial instruments, and both are measured in terms of the Net Asset Value Per Unit (NAVPU) or Per Share (NAVPS).

That doesn’t mean, however, that they are identical. Mutual funds are offered by investment companies and run independently by managers. When you purchase a mutual fund share, you automatically become a stockholder of that company.

Mutual funds also have entry or exit fees, and will either be purchased by the investment company (open-ended funds) that offered it, or are tradeable in an organized securities exchange (close-ended funds).

Mutual funds are regulated by the Philippine Securities and Exchange Commission (SEC), and are covered by a specific law called the “Investment Company Act of the Philippines” (R.A. 2629). They can only be sold by a Certified Investment Solicitor, someone with a license given by the SEC.

UITFs, on the other hand, are exclusively offered and managed by a bank’s Treasury or Trust department. Instead of entry or exit fees, a management or trust fee (usually a certain percentage of the principal) is charged. When you want to cash in your UITF, you need to do so at the issuing bank at the current net asset value.

The Banko Sentral ng Pilipinas (BSP) is the regulating body for this type of financial instrument. There is no specific law that covers UITFs, and there is no special license required to sell them.

Range of advantages

Mutual funds allow people to invest in higher-yielding outlets that most individuals do not have access to. Maintenance is not an issue because these funds are run by full-time professional managers.

For your peace of mind, mutual funds are registered with, and heavily regulated by, the Securities and Exchange Commission. All earnings are exempt from capital gains tax.

Another advantage of mutual funds is their liquidity. You can buy without needing to find sellers because the fund manager and the fund itself will always have shares available for you. You can also sell without having to look for buyers because both the manager and the fund will always be willing to buy shares from you.

Mutual funds also give you instant diversification, because they spread your investment across various asset classes. They also fit every type of risk profile, from conservative to aggressive and in-between.

If you’re looking for a way to get into investing that doesn’t require a lot of time or effort, mutual funds might be the right fit for you.



Andoy Beltran is a stock broker and entrepreneur. He heads Business Development and Market Education for First Metro Securities. Andoy is a self-professed "soldier of love," who believes that "Your money will not invest itself. Do it."

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