What are mutual funds?

Mutual Funds are professionally managed investment products, registered under the Securities and Exchange
Commission (SEC). Mutual Funds pool together a collection of assets - generally stocks, bonds, cash or a combination
thereof - held by multiple shareholders for the purpose of investing.
These funds are managed by a professional fund manager who invests the collected money in financial securities such as
stocks, bonds, or money market instruments.
The value of a share of the mutual fund, called the Net Asset Value (NAV), is calculated daily based on the fund’s total
value divided by the total number of outstanding shares.

Mutual Funds vs. UITF: What’s the difference?

What are UITF?
Just like mutual funds, Unit Investment Trust Funds or UITF are also collective investment schemes where pooled funds
are managed by an investment team that invests in a variety of investment securities.
UITF are typically offered by banks or trust corporations in the Philippines and are offered to investors as “investment
products.” That’s one primary difference between these two investment outlets. Investors of UITF do not become owners
or shareholders, unlike in mutual funds. We explain this and other points of differences below.

Offerer or Fund Manager. Mutual Funds are offered by investment companies independently registered with the
Securities and Exchange Commission (SEC). Therefore, when you buy a share of mutual fund, you become a stockholder
of the mutual fund and you acquire the rights of a regular stockholder, including right to vote and right to receive
dividends, if distributed by the mutual fund. UITF, on the other hand, is a trust product of banks or trust corporations.
When you buy UITF, you merely buy “units” of investment, not shares of a company. Therefore, you do not acquire
shareholder rights in the bank. You do not get the right to vote, unlike in a mutual fund where you’re a shareholder.

Fund Manager. In mutual funds, money is entrusted to a group of full-time professional fund managers appointed by the
investment company. In UITFs, money is typically managed by the Trust Group or Trust Department of the bank (or the
Investment Management group in a Trust corporation). The competencies and certifications of Mutual Fund and UITF
fund managers are usually the same, but in terms of professional affiliation, mutual fund managers are typically members
of the Philippine Investment Funds Association (PIFA) while UITF investment managers are typically part of the Trust
Officers Association of the Philippines (TOAP). It’s possible that fund managers are members of both, especially if their
institution offers both mutual funds and UITF.

Price. The price of a MF share or a UITF unit is measured by its current net asset value. The Net Asset Value (NAV) is
simply the difference between the values of the total assets of the fund less its total liabilities. This total NAV is divided by
the number of MF shares or UITF units outstanding. In the case of mutual funds, the resulting number is is called NAVPS
or Net Asset Value per Share, while in the case of UITFs, this is called NAVPU or Net Asset Value per Unit. Sample
computations of NAVPU and NAVPS are explained in later section of this article.
Fees. Investments in mutual funds are charged sales loads, which may be in the form of entry or exit fees. Entry fees are
upfront sales load or outright expenses charged even before a mutual fund account is opened. Exit fees, or redemption
fees, are charged when shares are redeemed and converted to cash. UITFs do not have entry or exit fees, but are
charged an annual management or trust fee which is a certain percentage of the invested amount, and may be deducted
from the fund’s assets every month or every quarter.

Applicable Law. A specific law in the Philippines called the “Investment Company Act of the Philippines” (Republic Act
No. 2629) governs mutual fund companies. UITF, on the other hand, are not governed by any specific law but since they
are product offerings of banks or trust corporations, they are governed by rules and regulations of the Bangko Sentral ng
Pilipinas (BSP). A UITF, although a bank product, is not a deposit product which means it is not covered by the  Philippine
Deposit Insurance Corporation (PDIC). Mutual Funds, because they are also not a deposit product, are similarly not
covered by the PDIC.

Regulatory Body. Mutual funds are registered companies, therefore, they are regulated by the Securities and Exchange
Commission (SEC) of the Philippines. UITFs, as mentioned earlier, are regulated by the Bangko Sentral ng Pilipinas
(BSP).

Sales Agents. To be able to sell shares of mutual funds, the agent must be a Certified Investment Solicitor, a license
awarded by the SEC to people who passed a licensure exam allowing them to sell mutual funds. UITFs, on the other
hand, are offered by people who may or may not have the SEC license. These are usually marketed and offered to
customers by staff in bank branches (in the case of banks) or marketing & sales employees (in the case of Trust
corporations).
What are the types of funds?
Mutual Funds are categorized according to where the pooled assets are invested. There are different types of mutual
funds to match your investment horizon and financial goals
1. Equity index funds - Invest in stocks that are components of the PSEi
2. Equity funds – primarily invest in the shares of publicly-listed corporations. The fund’s objective is typically capital
appreciation or long-term growth through capital gains. Dividends earned from the shares are also an important
source of income for the fund.Equity funds carry relatively more risk compared to other assets but historically
provide higher returns as well. Most peso-denominated equity funds invest in common stocks or preferred
shares of companies whose shares are listed in the Philippine Stock Exchange. Some dollar-denominated funds,
meanwhile, invest in stocks traded in foreign stock exchanges.
3. Balanced funds - are a type of pooled funds invested in a mixture of equities and fixed-income securities, such
as Bonds. The goal is to provide total return consisting of a high level of income consistent with preservation of
capital and liquidity. Balanced funds are ideal for investors who want the benefits of both stocks (capital
appreciation) and fixed-income securities (preservation of capital).
4. Bond funds - invest primarily in fixed-income securities issued by the government or large domestic corporations.
Examples of fixed-income securities include government bonds (such as Treasury bills and RTB or Retail
Treasury Bonds), corporate bonds, or LTNCD (Long Term Negotiable Certificate of Deposit). Because bulk of the
fund’s investments are in securities with a fixed rate of return, bond funds are generally considered to be less
risky versus equity funds.
5. Money market funds - provide current income to investors by placing the pooled funds in short-term securities with
maturities of one year or less. Among the four types of investment funds, money market funds provide the least
amount of risk. Examples of investment assets that usually comprise the portfolio of a money market fund are
short-term government securities, special deposit arrangements, short-term notes, and time deposits.

How can mutual funds help me?

1. EASY WAY TO OWN SECURITIES - Mutual funds are a convenient way of investing in a variety of securities that
can match your different financial goals.
2. PROFESSIONALLY MANAGED - Professional fund managers bring in the expertise related to making investment
decisions. These involve asset selection process and monitoring the overall composition of your portfolio
3. DIVERSIFICATION - Mutual funds minimize risk by spreading the investment among a variety of assets.
4. LIQUIDITY - Investors can typically redeem their mutual fund shares at any time.

Mutual Fund options based on Investor Profile

Type of Fund Income Objective Risk Tolerance Investment Period

Equity Fund Capital Appreciation High Risk Long-term (At least 5 years)
Balanced Fund Total Return Medium Risk Mid- to Long-term (3 to 5 years)
Bond Fund Current Income Medium Risk Short- to Mid-term (1 to 3 years)
Money Market Fund Capital Preservation Low Risk Short-term (1 year or less)

For example, an investor with an income objective of capital appreciation (capital growth) and with high risk tolerance
(able to absorb potential losses) and with long-term investment horizon (at least 5 years) will benefit greatly by investing in
an equity mutual fund.
Meanwhile, an investor whose income goal is merely to preserve capital and with relatively low risk tolerance (i.e., not
willing to accept possibility of monetary loss) with a short-term investment horizon (a few months to one year) would
find money market fund a more appropriate investment option.

How to Invest in Mutual Funds: Step-by-Step Guide

Step 1: Choose a fund you want to invest in.
Step 2: Find an authorized agent selling the fund.
Step 3: Fill out the application documents.
Prospective mutual fund investors will normally be asked to complete three forms prior to investing:
 Personal Information Sheet or Application Form
 Investor Profile Questionnaire or Investor Assessment Form; and
 Order Ticket or Online Order Form
The forms may vary depending on the mutual fund company, but they are pretty much the same thing.
The Personal Information Sheet or Application Form requires you to complete your personal details. The Investor Profile
or Investor Assessment Form, meanwhile, evaluates and identifies your risk tolerance and investment goal. Finally, the
Order Ticket or Online Order Form contains your specific instruction on the type and number of mutual fund shares you
want to purchase.
Step 4: Make the payment in authorized payment centers.
Make sure you transact with authorized representative of mutual fund companies! There have been instances in the past
wherein a supposed agent did not remit the investment to the mutual fund company. Unfortunately, I had this exact
experience with another mutual fund agent who was a relative of mine.
Step 5: Monitor your investment.

How to Earn Money in Mutual Funds

Investors make money when the mutual fund increases in value. This happens because a mutual fund can earn in two
ways:
1. From the capital gain, or increase in value, of the securities held and owned by the fund; and
2. Through dividend or interest income received from the assets held by the fund.
Proceeds from these earnings, merely reduced by the fund’s operating charges and other expenses, are passed along as
income to investors of the mutual fund. The value of each share of the mutual fund is called Net Asset Value per Share
(NAVPS).
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.
How NAVPS is computed in Mutual Funds

1. Determine the number of shares owned

You know this now: when you invest in mutual funds, you’re actually buying “shares” of the mutual fund company. Each
share is priced using the NAVPS or the Net Asset Value per Share, a figure that changes every day since it represents
the “market value” of all investments owned by the mutual fund company.
Let’s assume you wish to invest P100,000 in a Mutual Fund. You checked and saw that the mutual fund’s NAVPS price is
currently P1.75.
Given this NAVPS value, if you invest P100,000 you will receive 57,142 shares of this mutual fund, computed as follows:
 P100,000 divided by P1.75 = 57,142 shares
You know this now: when you invest in mutual funds, you’re actually buying “shares” of the mutual fund company. Each
share is priced using the NAVPS or the Net Asset Value per Share, a figure that changes every day since it represents
the “market value” of all investments owned by the mutual fund company.
Let’s assume you wish to invest P100,000 in a Mutual Fund. You checked and saw that the mutual fund’s NAVPS price is
currently P1.75.
Given this NAVPS value, if you invest P100,000 you will receive 57,142 shares of this mutual fund, computed as follows:
 P100,000 divided by P1.75 = 57,142 shares

2. Determine the current NAVPS

At any day, you can compute the value of your mutual fund investment. The only two things you need to know are:
1. Number of shares you own; and
2. NAVPS price on that day
Let’s assume that at the end of one year, the NAVPS of your mutual fund increased to P2.50.
To calculate the profit, here’s what you simply have to do:
Mathematically:
 Current NAVPS = P2.50
 Original NAVPS when you bought the shares = P1.75
 Difference in NAVPS prices = P2.50 – P1.75 = P0.75
 Number of Shares you Own = 57,142 (from Step 1 above)
 Profit = Difference in NAVPS price x Number of Shares you Own
 So your Total Profit = P0.75 x 57,142 = P42,856.50
This means your P100,000 investment has already produced you a profit of P42,856.50.
One important point to remember, though. This profit is still “paper profit” or “unrealized income.”
That’s because you have not redeemed the shares yet. Any day afterwards, the NAVPS could still change which means
your fund value (and profit) will also change. And when that happens, whatever “paper profit” you have computed become
irrelevant.

Step 3: Calculate actual profit at time of redemption

Let’s assume it’s now the 2nd year and you wanted to encash and redeem your shares.
Before we proceed, we’ll highlight again that the fund value and your profits at the end of Year 1 are now irrelevant. Yup,
they are NOT important anymore at this point. Whatever “profit” you have previously gained was not “realized” since you
did not redeem the shares.
Let’s assume that at the end of Year 2, the NAVPS price is P2.00. As in Step 2, we can compute the profit by comparing
the current and original NAVPS:
 Current NAVPS = P2.00
 Original NAVPS = P1.75
 Difference in NAVPS prices = P2.00 – P1.75 = P0.25
 Number of Shares Owned = 57,142
 Profit = P0.25 x 57,142 = P14,285.50
At the end of Year 2, your mutual fund investment has earned profits of P14,285.50.
If you redeemed all 57,142 shares, you will get P14,285.50 cash as profit.
The total money you would get from the mutual fund is this profit plus the original investment (P14,285.50 + P99,998.50),
which totals P114,284.00.
The total cash proceeds, which you’ll receive upon redemption, can also be computed this way:
 Current NAVPS = P2.00
 Number of Shares Owned = 57,142
 Total Fund Value = P2.00 x 57,142 = P114,284.00
Again, be reminded that this computation does not consider any fees charged by the fund. Your fund value may be
reduced by any exit fees or back-end sales loads  charged by the mutual fund.