What is a Mutual Fund?

A Mutual Fund is an investment company that pools the funds of many individual and
institutional investors to form a massive asset base. 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 owners or shareholders. Their
purchases provide the money for a mutual fund to buy securities such as stocks and bonds. A
mutual can make money from its securities investments in two ways: a security can pay
dividends and interest to the fund, or a security can rise in value. The fund passes any
dividends, interest or profits on the sale of its portfolio securities, less fund expenses, to
shareholders in the form of distributions.
Different Funds, Different Features
In the Philippines , there are currently four basic types of mutual funds---stock (also called
equity), balanced, bond and money market funds. Bond funds invest primarily in bonds such as
treasury notes issued by the Philippine government and commercial papers issued by reputable
companies in the Philippines . Having a full basket of only fixed-income securities, bond funds
provide capital preservation while maintaining a conservative stance in terms of asset allocation.
Like bond funds, money market funds also have a conservative stance since they have a full
basket of fixed income funds. The main difference lies in the term of investments of money
market fund investments, which is one year or less. Equity funds invest primarily in shares of
stock issued by Philippine corporations.
The dominance of stock issues within the portfolio
positions the fund to attain a more aggressive rate of growth. Balanced funds invest in both
shares of stocks and bonds, thereby accessing the growth potential of stocks tempered with the
presence of secure fixed-income instruments.
Professional fund managers create value for
shareholders by providing superior yields within controlled risk exposures. Certainly, expective
in both security selection and asset allocation go a long way in ensuring better long-term
rewards for mutual fund investors.
As of September 30, 2010, there are a total of 43 mutual funds in the country, broken down as
follows:
Category
Equity Funds (PhP) 8
Equity Funds (USD) 1
Balanced Funds (PhP)

Balanced Funds (USD)

Bond Funds (PhP)

10

Bond Funds (USD) 9

Bond Funds (Euro) 2
Money Market (PhP)
TotaL 43

Why Invest in a Mutual Fund?

Interest rates can be volatile and passive short-term investing can erode investment values due to inflation.
On the other hand, the stock market has historically outperformed both short and long-term bank deposit
rates. Unfortunately, not so many people are familiar with active financial management and effective
diversification. Through mutual funds, even investors with limited resources can participate in combinations
of these high-yielding investment instruments without the headache of personally selecting and monitoring a
portfolio.
Mutual funds are ideal vehicles for growing money over time. It can be used as a savings medium for
retirement, education for a child, or building up a long-term cash fund for some specific future financial
objective. While largely thought of as a retail financial product, mutual funds are also ideal instruments to
augment the yields generated by organizational funds and enhance their level of diversification. Mutual funds
have been popular investments for pension and trust programs, other employee benefit funding objectives,
and institutional asset-liability matching.
Advantages in Investing in a Mutual Fund
Mutual funds provide a combination of benefits to investors which cannot be matched by other investment
instruments. These advantages are as follows:
Professional Management
One of the main attractions of mutual funds is that it affords its investors, particularly the small ones, the
services 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.
Low Capital Requirement
Direct investments usually require substantial capital. The minimum investment amounts for Treasury
Bills and commercial paper, for instance, range from Php100,000 to Php1 million depending on the bank or
investment house you are dealing with. This also 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 Php1,000 to Php5,000, he may not find a stockbroker who will
service his account because they prefer to deal with high net worth individuals (rich people in layman's
terms) or at least with people who have substantially more than just Php5,000.00 to invest. In contrast,
most mutual funds in the Philippines require a minimum initial investment amount of only Php5,000.00
and minimum additional investments of Php1,000.00.
Diversification
There is a saying that goes, Do not put all your eggs in one basket. This adage is especially true in the
world of investments which is full of uncertainties. There is no such thing as a sure thing. 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 a mutual fund, they achieve instant
diversification because the fund is usually invested in a wide array of securities.

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 (7) 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 (well on second thought, maybe not). Nevertheless, 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
(this is discussed in greater detail in a latter section). They also have to submit regular reports to the SEC
as well as to their shareholders. As mentioned earlier, 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 instance, with its millions under management, it can negotiate for lower stockbrokerage 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
In other countries, mutual funds can be purchased directly from a funds or through a broker, financial
planner, bank or insurance agent, by mail, over the phone and increasingly over the internet. The
popularity of mutual funds in the Philippines is fast catching up. It may be a matter of time for this level of
convenience to be a reality in the country. Funds also 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.

1. Mutual funds may not invest in any of the following:

Margin purchase of securities (investments in partially paid shares

excluded)
Commodity futures contracts
Precious Metals
Unlimited liability investments
Short selling of currencies
Short selling of investments
Other investments as prescribed by the SEC

2. Mutual funds are not allowed to incur any debt or borrowing unless at the time of the
occurrence there is asset coverage of at least 300%.
3. Investment companies cannot undertake in an underwriting or selling group in connection
with the public distribution of securities except for its own capital stock.
4. Funds cannot make any investment for the purpose of exercising control of management.
5. The maximum investment any fund in any single enterprise shall not exceed ten percent
(10%) of the fund's net asset value except obligations of the Philippine government or its
instrumentalities. Provided, that in no case shall the total investment of the fund exceed ten
percent (10%) of the outstanding securities of any investee company.
6. For liquidity purposes, at least 10% of all funds shall be invested in liquid/semi-liquid
assets such as Treasury notes or bills, BSP Certificates of Indebtedness, and other
government securities or bonds. Savings and time deposits with any government or
commercial bank, provided that in no case shall such savings or time deposits be accepted
or allowed under a bearer, numbered account or similar arrangements.
7. The investment of funds in real estate properties shall not exceed 25% of the total
investment portfolio.
8. Funds cannot engage in lending operations without prior approval of its Board of
Directors. Such approval shall be limited only to corporations or other entities, private or
public, determined to be financially sound by the Board.