THE ROLE OF MUTUAL FUNDS

The role of Mutual funds is to provide access to financial markets to small private investors but other than than, let's discuss the role it gives to our country. 

Help in the Development of the Capital Markets

Mutual funds can play a vital role in the development of the capital markets of our country by mobilizing funds from thousands or even millions of investors and by converting short-term savings to long-term sources of funds. These funds can then be used to finance long-term projects and to sustain the country's economic growth.

Stabilize the Domestic Financial Market
Time and again, we have witnessed the sudden and seemingly irrational movements in our stocks, bonds and money markets due to the massive inflow and outflow of foreign portfolio funds. A sizable local mutual fund industry can help stabilize securities prices by protecting fundamentally sound issues from speculative attacks.

Promote Savings & Investments

Mutual funds are generally sold as medium to long-term investment instruments. They, therefore, help promote savings and investments, and encourage people to plan for their financial future.

Wealth Distribution

Because of their low initial investment requirement, mutual funds provide investors of moderate means access to securities that offer relatively better returns - securities (like Treasury Bills, commercial paper, and stocks) that small investors would normally not have access to because of their limited financial resources. Mutual funds gives small investors the opportunity to participate in and benefit from the economic gains of the country, thereby contributing to our government's effort towards a more equitable distribution of wealth.

Generate Revenues for the Government

Mutual funds also help generate revenues for the national government as well as local government by the way of taxes. These include documentary stamp tax, corporate income tax, stock transaction tax, final withholding tax, municipal tax, mayor's permit, etc.

Provide Employment

Mutual fund provides job to thousand of people: mutual fund investment solicitor, portfolio managers, traders, research analysts, accountants, clerks, support personnel, administrators, auditors, brokers, custodians, transfer agents, etc.

Source: PIFA, SEC

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ADVANTAGE AND BENEFITS OF INVESTING IN MUTUAL FUNDS

Professional Management 

The service of full-time professional managers whose job is to analyze the various investment products available in the market and select those that would give the best possible returns to the fund and its shareholders affords it's investors, particularly the small ones.

Low Capital Requirement

Direct investment usually requires substantial capital. The minimum investment amounts for Treasury Bills and commercial paper, for instance, range from Php 100,000 to Php 1 Million depending on the bank or investment house you are dealing with. This holds true for stocks because while an investor may be able to buy one "lot" (shares are sold in board lots of 10 to 1 Million shares depending on the price at which these shares are traded) for as low as Php 1,000 to Php 5,000 he may not find a stockbroker who will service his account because they prefer to deal with high net worth individuals or at least with people who have substantially more than just Php 5,000 to invest. In contrast, most mutual funds in the Philippines require a minimum initial investment amount of only Php 5,000 and subsequent investments of Php 1,000.

Diversification

An important investment principle that requires holding several securities to reduce the risks associated with investing in individual securities is called diversification. When people invest in mutual fund, they achieve instant diversification because the fund is usually invested in a wide array of securities. As the saying goes " Do not put all your eggs in one basket. This adage is specially true in the world of investments which is full of uncertainties.

Liquidity

Liquidity is the ability to readily convert investments into cash. Other investment products require investors to find a buyer so that he can liquidate his investment. That is not the case with mutual fund shares because the fund itself stands ready to buy back these shares at the prevailing Net Asset Value Per Share. While the law provides that redemption proceeds must be given within seven  banking days from the date of the redemption request, most funds are able to pay the redemption proceeds within a day. Mutual funds are, therefore, considered very liquid investments.

Safety
Safety is a very important consideration for most investors. Sometimes even more important than potential returns. Mutual funds are highly regulated by the Securities and Exchange Commission under the Investment Company Act and its implementing rules. They are prohibited from investing in particular investment products and engaging in certain transactions. They also have to submit regular report to the SEC as well as to their shareholders. All of the fund's assets must be held by a custodian bank for a safekeeping.

Potential Higher Returns
Because a mutual fund is managed as a single portfolio, it is able to take advantage of certain economies of scale. For example, with it's millions under management, it can negotiate for lower stock brokerage fees or command higher interest rates on fixed-income investments. In the end, however, it is still the investment adviser who really makes the big difference between making direct investments and investing in mutual funds because very few individual investors can match the experience and skill of full-time professional fund managers.

Convenience
The popularity of mutual funds in the Philippines is fast catching up. Funds offer a variety of other services, including monthly or quarterly account statements, tax information, and 24 hour phone and computer access to fund and account information.

Transparency
Investment company advisers provide investors with updated information pertaining to the fund. All material facts are disclosed to investors as required by the SEC.

Flexibility
Investors are allowed to modify investments strategies over time by transferring or moving from one fund to another within a mutual fund family.

Source: PIFA

BENEFITS OF A MUTUAL FUNDS

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Understanding Mutual Funds

Mutual Fund is an open-end fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with stated set of objectives. The assets are then entrusted to a full time professional fund manager who develops and maintains a diversified portfolio of security investments. People who buy shares of a mutual fund are its owner or shareholders. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will depend on the prevailing Net Asset Value Per Share (NAVPS).

What is NAVPS?

Investing in Mutual Funds is similar to buying shares of a company. Your share has a specific value which will vary from day to day. The term used to determine the value of your investment in Mutual Funds is referred to as Net Asset Value Per Share (NAVPS), NAVPS is calculated daily at the end of trading day, so the price of your investment changes from day to day. 

NAVPS = Total Value of Fund Asset - Liabilities

Offering Price

How is the number of shares computed?

To compute for the number of shares bought, simply divide the investment amount by the offering price. Offering Price is equivalent to NAVS plus applicable sales charge.

Basic Type of Mutual Funds  in the Philippines 
(According to Investment Objectives)

1. Bond Funds - invest primarily in bonds such as Treasury Notes issued by the Philippine Government and commercial papers issued by reputable companies. Having a full basket of only fixed-income securities, bond funds provide capital preservation while maintaining a conservative stance in terms of asset allocation.
2. Equity Funds (Stock Funds) - invest primarily in shares of stock issued by Philippine corporations and listed on the Philippine Stock Exchange.
3. Balanced Funds - invest in both shares of stock and debt instruments. It is a type of fund that is even more diversified in terms of classes of assets in its portfolio is the asset allocation fund. It may invest in practically all types of securities - depending on what the fund manager deems as approriate for the times. 
4. Money Market Funds -  invest purely in short-term (one year or less). May be diversified or specialized by the type of money market instrument (prime commercial paper, short-term government securities, repurchase agreements, etc.                  

PESOS & SENSE EXPLAINS: MUTUAL FUNDS

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