(UPDATED!) Guide to Investing in Philippine Mutual Funds
What is a Mutual Fund?
A mutual fund is an investment fund that collectively pools money from various individual and corporate investors. The pooled money is managed by a professional fund manager who invests in stocks, bonds, money market instruments, and other securities.
How do Mutual Fund investors make money?
The mutual fund earns in two ways:
- From the capital gain, or increase in value, of the securities held and owned by the fund; and
- Through dividend or interest income received from the assets held by the fund.
These proceeds, net of whatever charges and expenses, are passed along as income to the mutual fund investors.
The value of each share of the mutual fund is called the Net Asset Value (NAV). NAV is calculated daily based on the fund’s total asset value divided by the total number of outstanding shares of the fund.
If the NAV is increasing, then that means mutual fund investors are making money from the fund. If the NAV is decreasing, then this means the fund is losing value and the investors are losing money.
Types of Mutual Funds in the Philippines
There are mainly four types of mutual funds in the Philippines: stock (or equity), bond, balanced, and money market.
1.Stock or equity funds
These funds invest in stocks of Philippine corporations listed in the Philippine Stock Exchange (PSE). Equity funds offer the highest possibility of growth among all mutual fund types, but they also have a corresponding high amount or risk.
2. Bond funds
These funds primarily invest in fixed-income securities, such as government securities (bonds, treasury notes, T-bills, etc.) issued by the Philippine government and commercial papers (corporate bonds, LTNCD, etc.) 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.
3. Balanced funds
A balanced fund is a mixture of both 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.
4. Money Market funds
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 investor’s investment goal 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.
Want to learn more details about Mutual Funds? Here’s our complete guide: Investing in Mutual Funds: A Guide for Filipinos