Read the Tagalog Version of this article: Ang Pag-i-invest sa Mutual Fund

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Same as UITF, another bank product that catches interest of lots of people is the Mutual Fund. I was often asked about this, asking the difference between these two bank products.

Well, let’s now talk about Mutual Fund. But before I explain the differences between the two, better if we know beforehand what a Mutual Fund is.

What is a Mutual Fund?

I do not know if teen-lovers in the Philippines nowadays still use the term “M.U.”, short for “Mutual Understanding”. It’s a special situation where in two good friends look as if they are in a boyfriend-girlfriend relationship; but if you ask if they are in a “relationship”, they will still deny it and say they’re not. Okay wait, I know, I know… maybe you’re asking: “Hey Green Stickman, it’s supposed to be a financial investment topic, and here you are, making introductions as if you are Joe D’ Mango (Joe D Mango is a radio DJ that gives advises about “Love and relationship” in the Philippines)”. Well you’re right. We are not going to talk about love; I am just after of the word “Mutual”. And in this topic, I will teach you how to be in “Mutual Understanding” with the investment companies that offer this kind of investment product. Although the characters here are not the boyfriend and girlfriend, the ones who are in the relationship here is the investor and investment company. You can say that they are “M.U.” in terms of funds. But unlike to the sweetheart case, the investment company has other M.U. and those are other investors like you who want to buy a part or “share” of the fund.

We can actually translate the word “Mutual” into “common”. To understand Mutual fund more easily, it is also the same with the word “common funds”. The funds will be the common share point of those who want to participate and invest. So in joining a Mutual Fund, you bought really the worth value of your “shares” from a common fund. Technically, a Mutual Fund is an open-ended fund where investors can buy their “share” in such funds which in turn managed by licensed and professional fund managers. The funds will be invested to various and different investment securities depending on the objective of such fund. A mutual fund is an “instantly diversified” fund and you can start, depending on the bank, with an amount of Php 5,000 to Php 10,000 here in the Philippines. But before starting to invest in a mutual fund, investors must consult a licensed mutual fund representative or financial advisor. This financial advisor will assist you but of course he must know your financial life goals (it’ll be better if you read my article about “Planning Your Financial Life Goals“). Once they’ve known your life plan, they can determine your financial needs, your risk appetite and as well as your investment horizon (I discussed this in my article “Know How To Invest Your Hard Earned Money” ). Determining it will able your financial advisor to give an appropriate advice to aid you in choosing the type of mutual fund that best suits you.
mutual fund ad 1

Types of Mutual Funds

There are four types of Mutual Funds:

  1. Money Market Funds - The funds are being invested in short-term debt instruments that do not exceed one year. If you are a “conservative” investor, it ought to put your money.
  2. Bond Funds – The funds are being lent or invest in government bond securities and even to corporations. Same to Money Market Fund, this fund are suggested for a “conservative” type of investors.
  3. Balanced Funds – The funds are divided where half is use to buy stocks and half is used in deposits and bonds. This type of fund is suggested for “moderate” type of investors.
  4. Equity Funds – The funds are bought and invested only to stocks market. It has the greatest risk, but also has the greatest returns of investment. This type of funds is highly suggested for “aggressive” type of investors.

How do Money Invested in Mutual Funds Earns?

Same as UITF, there is no guaranteed rate of return as your fixed income in a Mutual Fund. And since it is not a deposit, it is not covered by PDIC in case of lost.

If you buy shares in a mutual fund, you’ll see from the certificate how many NAVPS you have. NAVPS stands for Net Asset Value per Share. So for example you buy a share worth Php 100,000.00 and the price of a “share” is Php 1.00; you will then have 100,000 shares in that fund. And for instance after 2 years it became Php 1.40 in value, and compelled to convert it to cash value, your 100,000 shares will be multiplied to such NAVPS. Like this: Php 1.40 x 100,000 = Php 140,000. In 2 year time, you earned Php 40,000 in doing nothing. Cool isn’t it? But if for example after 2 years the NAVPS went down to 0.8,your share will only be: 0.8 x 1000,000 = 80,000 pesos. It means, you have lost 20,000 pesos there, and that is not cool.

Based on the data above, we can summarize it using this table:

Date NAVPS Amount No. of Shares Profit or Loss
PURCHASE (June 06, 2012) 1.00 P 100,000.00 100,000 N/A
REDEEM (June 06, 2013) 0.80 P 80,000.00 100,000 -20%
REDEEM (June 06, 2014) 1.40 P 140,000.00 100,000 +40%

But do not worry because the appointed Fund Manager by the investment company, who will manage the fund, is a professional. And he will make sure that your money will earn so do not panic and have trust in your Financial Advisor or Financial Planner (but if your Financial Planner is the one who panic, then I guess it is something you should worry…LOL!). If you want to make sure you win, here’s a good tip: If you join a Mutual Fund, make sure you will not pull out your money for least 5 years. In this case, you’ll still win even there is an increase or decrease on the price of NAVPS. So the longer you hold your investment, the greater the chance for a better returns. Just give your money some “time” to grow.

Management Fees of A Mutual Fund

The management fee for a mutual fund depends on the type of fund you entered.

  1. Money Market Funds - 0.5% to 1.0% of the asset value of your money.
  2. Bond Funds – 1.0% to 2% of the asset value of your money.
  3. Balanced Funds - 2% of the asset value of your money.
  4. Equity Funds – 2% of the asset value of your money.

Moreover, there were also other charges in Mutual Fund that are called “front-end load” and “back-end load”.

The front-end load is like an entry fee. You must pay before you can purchase shares in your chosen fund. Your front-end load or entry fee depends on the amount of money you have. If you will invest less than Php 100,000, there is an entry fee of 2%. If you will invest an amount of Php 100,000 to Php 1,000,000, the entry fee is at 1.5%. If 1 Million to 5 Million, you will have an entry fee of 1.0%. And if it is more than 5 million, the entry fee is 0.5%.

The back-end load is same as the exit fee. You also need to pay if you want to pull out or drew you money. If you drew your investment immediately in less than a year, you will have an exit fee of 5% from your money’s net asset value. If after 1-2 years, the exit fee is 4% of net asset value of your money. If 2-3 years, 3% exit fee. If 3-4 years, 2% exit fee. If 4-5 years, 1% exit fee. And if invested for more than 5 years, there will be NO exit fee. Cool isn’t it? So basically and obviously, it’s better to invest your money for at least 5 years.

By the way, I would like to mention also that these front-end load and back-end load fee is exclusive of the 12% VAT for some investment companies (e.g. Sun Life Prosperity Fund). This is one of the many things that you should ask to your Financial Advisor. You have to know the kind of load options you have for the fund you purchase, because you might be shock to learn that there are “hidden” charges on your chosen investment.

mutual fund ad 2

Now that we have an idea of what and how to earn a mutual fund, we can now compare the two.

Mutual Fund vs UITF

Is the 4 classes of Mutual Funds seems familiar? Yes, you’re right, they just about the same with UITF. If they just alike, so what is the difference between these two? And after all, you level up after reading my previous article about UITF (If not, back out and read my article about “Investing in UITF” ), we can understand Mutual Fund more easily if we would compared this to another bank product like in UITF.

As I said, both Mutual Fund and UITF are dealing in a fund. But there are some differences between them. What are those?

  1. Price of NAV – NAVpu Vs. NAVps
    Do you remember NAV? NAV or Net Asset Value is the “net” amount of the fund you bought. And since in Mutual Fund we are talking about “shares”, they called it NAVps or Net Asset Value per share. Meanwhile, in UITF, we are talking about “units”, so they called it NAVpu or Net Asset Value per unit. But in concept, either NAVpu or NAVps are both refer to their respective funds.
  2. Fund Managers
    A mutual fund is managed by full-time professional fund managers set or chosen by the investment company itself. But in UITF, the fund is managed by fund managers from a “Trust Group” (as I discussed it from my article “Investing in UITF”) of a bank.
  3. Fees
    A mutual fund may have entry fees or exit fees and management fees. I mean, if you buy a share, and the mutual fund that you joined have an entry fee, you have to pay beforehand. It seems same to SUV terminals, “You have to pay first before boarding”. The exit fee is the investor fee at the time he redeem his share and he convert his share in cash. Like in Philippine jeepneys, “pay first before you disembark”. Meanwhile, UITF has the so called trust fee. This fee is like an exit fee.
    The entry and exit fees of mutual fund and the UITF trust fee (depending on the type of investment) is usually worth 0-2% of the net asset value of your money.
  4. Offerer
    Who gives you chance to invest? Mutual Fund is being offer by an investment company through a bank. In acquire your share of a company; you are given some “rights” such as receiving dividends being a stockholder of a company.
    Whereas in UITF, you are only buying units of fund itself and not the fund shares of the company. So you do not have “shareholder rights” unlike in a mutual fund.
  5. Sales Agent
    The agent of a mutual fund must be a Certified Investment Solicitor. The license is issued by SEC for an agent to sell a mutual fund. As for UITF, license is not necessary. Thus if you invest in UITF, there are times that the details of contents are not fully explain unless you can thoroughly look into them and ask questions.
  6. Applicable Law
    Mutual fund is under the law: “Investment Company Act of the Philippines”. While UITF is under the “General Banking Law” of the Philippines.
  7. Regulating Body
    Mutual funds are regulated by SEC or the Philippines Securities and Exchange Commission. While UITF are regulated BSP or Central Bank of the Philippines.

We can summarize these seven major differences on the table below:

Mutual Funds UITFs
Fund Manager Appointed by the investment company Trust Group of the bank
Fees Management Fee, Entry Fee; Exit Fee Trust Fee
Offerer Investment Companies Banks
Sales agents Must be certified Investment Solicitor No license necessary
Applicable Law “Investment Company Act of the Philippines” “General Banking Law”
Regulatory Body SEC BSP

In case you are interested to invest in a mutual fund, you can ask me directly by sending a message on my FB page. But of course you have to LIKE my page. Just click this link. I will be glad to help you open an account and start your investment.

For the mean time, let’s end our discussion about the mutual fund here. For sure after read the article, you’ve gain another level of knowledge on finance. In the next article, I will discuss about investing in Stocks Market.

And always remember, the harder you work to earn a certain amount, the hardest for it to save, invest and multiply.

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