Saturday, April 19, 2014

Mutual Fund

Mutual funds have become the most popular way for investors to participate in the financial markets. From small beginnings in the mid-1800s in Europe, mutual funds have become a giant part of the financial landscape. It then hit the United States, where the faculty and staff of Harvard University created the first American pooled fund in 1983. About thirty years later, three Bostonian securities executives created the first official mutual fund, called the Massachusetts Investors Trust. In 1976, John C. Bogle opened the first retail index fund, called the First Index Investment Trust. Now called the Vanguard 500 Index Fund, in November of 2000 it became the largest mutual fund ever, with $100 billion in assets. Currently, trillions of dollars are invested in mutual funds in the United States alone.

A mutual fund provides an opportunity for a group of investors to work toward a common investment objective more effectively by combining their monies to leverage better results. Mutual funds are managed by financial professionals (called the fund manager) responsible for investing the money pooled by the fund’s investors into specific securities (usually stocks and bonds). His primary objective is to effectively adopt the fund’s portfolio of assets to various investment situations, so that it can give its investors the maximum gain possible. By investing in a mutual fund, you become a shareholder in the fund. The underlying logic of mutual funds is that it provides stock market diversity without requiring a great deal of cash.

Just as carpooling saves money for each member of the pool by decreasing travel costs for everyone, mutual funds decrease transaction costs for individual investors. As part of the group of investors, individuals are able to make investment purchases with much lower trading costs than if they tried to do it on their own.

There are several advantages to investing in a mutual fund. First, diversification. With this collection of different securities, the investor is protected from substantial losses because even if one or several securities perform poorly, the other securities may perform well. Second, professional management. Third, market access. Some instruments are only sold in high volumes which may be too large for an individual investor and are usually sold to big investors such as institutions. Through the large pool of money, the fund can partly invest in these instruments as an addition to its underlying portfolio. Lastly, convenience. For most funds, unless a minimum holding period is specified, the fund investor can get in or out of the fund at any time. He can buy or sell shares of the fund at the current market price.    

Mutual funds can vary in terms of objectives. Those that invest heavily in equities are usually called equity funds or growth funds, while those that try to keep an equal ratio of fixed income and stocks are called balanced funds. Before investing in a fund there is one important thing you first have to do. Read the fund’s prospectus. All the information you need to know about any particular mutual fund is contained in its prospectus. Facts such as; investment objectives, fees and details about the investment manager are some things you need to know before investing.

Mutual funds are perfect for the small investor. Investing is easy as opening a bank account. The price of a mutual fund is determined by the value of the underlying assets it has in its portfolio. The total value of these assets, less its liabilities are then divided by the number of outstanding shares then you get the fund’s price or more popularly called net asset value per share (NAVPS or NAV). By multiplying the number of shares you own by the fund’s NAV, you can calculate the current value of your holdings.  

How do you make money in mutual funds? Obviously, you will profit by selling shares of your mutual fund at a higher NAV than that at which you bought. There can be profits in the form of capital gains when a fund manager sells off a security. While funds are constantly reinvesting money, you can actually see money from the fund as you hold onto it. Income funds dispense income from dividends paid by stocks within the portfolio or interest paid by bonds in a bond or balance fund.

Mutual funds, as a rule, are not as volatile as a single stock because they are made up of a number of stocks. Even in a market crash some of the stocks will stay afloat, although the fund’s NAV will drop. The balance tends to offset losers with winners, particularly since the market has always fared well over time. Not a single mutual fund has gone bankrupt since 1940. This certainly can’t be said for banks and other savings institution. It’s just one more reason for the popularity of these funds.

So now we have a basic overview of the funds available. How do you go about investing in mutual funds? Apart from setting up an investment strategy, investing in funds requires understanding some basics about how the fund world works, including fees, loads, NAV and taxes. The biggest issue for a fund investor is the cost of buying mutual funds, a cost that manifests itself in the form of fees and commissions. Each fund has an “expense ratio,” which is the percentage of your assets it charges each year for handling your money. Mutual funds can also have other fees, called loads, which are one time commissions charged either when you invest in the fund or when you redeem your investment. Since fees can play a big role in how your investment performs, it’s important to check the prospectus to find out what kind of fees your mutual fund is charging.

Picking the right mutual funds is a lot like selecting the right kinds of stocks to purchase. Among the similar strategic rules of thumb: watch the fees, diversify your holdings to manage your risk, and don’t chase performance. The rebalancing act is crucial to avoid a similar pitfall for fund investor: chasing performance. Newspapers list the top-performing funds. A lot of investors then plow their money into these top-performing funds.

The mutual funds in the Philippines as of April 19, 2014, are as follows:

Stock Funds

3-Year Returns %

5-Year Returns %
ALFM Growth Fund, Inc.
ATRKE Alpha Opportunity Fund, Inc.
ATRKE Equity Opportunity Fund, Inc.
First Metro Save and Learn Equity Fund, Inc.
Philam Strategic Growth Fund, Inc.
Philequity Dividend Yield Fund, Inc.
Philequity Fund, Inc.
Philequity PSE Index Fund, Inc.
Philippine Stock Index Fund Corp.
Sun Life Prosperity Philippine Equity Fund, Inc.
United Fund, Inc.
Balanced Funds

ATRKE Philippine Balanced Fund, Inc.
Bahay Pari Solidaritas Fund, Inc.
First Metro Save and Learn Balanced Fund, Inc.
NCM Mutual Fund of the Phils., Inc.
One Wealthy Nation Fund, Inc.
Optima Balanced Fund, Inc.
PAMI Horizon Fund, Inc.
Philam Fund, Inc.
Sun Life of Canada Prosperity Balanced Fund
Bond Funds

ALFM Peso Bond Fund, Inc.
Cocolife Fixed Income Fund, Inc.
Ekklesia Mutual Fund Inc.
First Metro Save and Learn Fixed Income Fund
Grepalife Bond Fund Corp.
Philam Bond Fund, Inc.
Philequity Peso Bond Fund, Inc.
Prudentialife Fixed Income Fund, Inc.
Sun Life Prosperity Bond Fund, Inc.
Sun Life Prosperity GS Fund, Inc.

Based on the above, the best-performing funds are: Philippine Stock Index Fund Corp (Stock Funds); First Metro Save and Learn Balanced Fund (Balanced Funds); and First Metro Save and Learn Fixed Income Fund (Bond Funds).

A useful tip of investing is “Past performance is no guarantee of future performance.” Indeed, last year’s best-performing fund can quickly become a laggard. Chasing performance is one of the most common fund investing errors. Rebalancing and sticking with your diversification strategy can help avoid this.


  • The Wall Street Journal
  • The Everything Investing Book, 2nd Ed.
  • PIFA

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