Introduction to Philippine Mutual Funds

What is a Mutual Fund?

A mutual fund collectively pools money from individual and corporate investors. These funds are managed by a professional fund manager who invests the money in stocks, bonds, money market instruments, and/or other securities.

The mutual fund earns in two ways: from the capital gain (increase in value) of the security and dividend or interest income. These proceeds, net of whatever charges and expenses, are passed on to the shareholders. The value of a share of the mutual fund, called the Net Asset Value (NAV), is calculated daily based on the fund’s total value divided by the total number of outstanding shares.

Types of Mutual Funds

There are mainly four types of mutual funds in the Philippines: stock (or equity), bond, balanced, and money market.

Stock or equity funds invest in shares of stock of Philippine corporations listed in the Philippine Stock Exchange. Equity funds offer the highest possibility of growth among all mutual fund types, but they also have a corresponding high amount or risk.

Bond funds invest primarily in fixed-income securities such as bonds or treasury notes issued by the Philippine government and commercial papers issued by reputable Philippine companies. Because these bonds are normally guaranteed, the possibility of loss is very low. Investing in bond funds provide capital preservation while maintaining conservative asset growth.

Balanced fund is a mixture of equity and bond funds. The high potential growth of equity investments is tempered by the  conservative growth of fixed-income securities. Obviously, the return of a balanced fund is normally somewhere between the return of an equity fund and a bond fund.

Money market funds are similar to bond funds because they also invest in fixed-income securities and the growth of the fund is conservative. The main difference lies, however, in the term of money market fund investments, which is usually short-term such as one year or less.

How to choose a good mutual fund

Choosing which mutual funds to invest in ultimately depends on the investor’s growth goal and risk tolerance. If the purpose is capital growth, equity funds are the way to go. Bond funds are chosen, on the other hand, if the investor prefers capital preservation over risky capital growth. For those who want medium risk and medium growth, balanced funds are the best option. Money market funds are for those who wish to earn a conservative amount of return in the short-term.

According to the Investment Company Association of the Philippines, a duly recognized association of investment companies in the country, there are currently a total of 22 mutual funds. Six (6) of these are bond funds, five (5) are equity funds, ten (10) are balanced funds, while one (1) is a money market fund.

More about Mutual Funds:

• Investing in Mutual Funds
• 2008 Performance of Philippine Mutual Funds
• Best Mutual Funds in the Philippines in 2007
• Discussion Forum: Mutual Funds and UITF

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