SANAOL, MUTUAL: A Guide to PH Mutual Funds

UP JFA Pisopedia
16 min readOct 10, 2020

We’re sure you have used this acronym at least once in your lifetime to refer to mutual friends in everyday conversations, manual focus in photography, mezzo forte in music class, molecular formula in chemistry class, medium frequency in physics, muscle fiber in biology class, and so on. For this article, we’re going to introduce the (only) MF you might need to know to navigate your way to financial independence.

In finance, MF stands for mutual funds. A mutual fund is an investment that pools up money from different investors which is then invested in a wide variety of stocks, bonds and other securities. A mutual fund is managed by a professional fund manager. Mutual funds can also be described as a corporation whose ownership is acquired through shares. This is why a mutual fund must be incorporated and registered with the Securities and Exchange Commission before operating. As such, when people say that they invest in a mutual fund, it means that they are buying a share in the mutual fund.

Now, you might ask, “Why do people invest in mutual funds instead of just directly buying stocks or bonds?” There are many reasons why people invest in mutual funds (and why it is popular) and below we outline some of the major reasons why:

  • Diversification and Lower Risk
    Mutual funds have a built-in diversity, in that MFs invest in a wide range of individual securities- from across industries to companies, and on a much larger scale which lowers your investment risk.
  • Convenience
    A mutual fund, as we’ve mentioned earlier, is professionally managed. Professional fund managers do all the research, monitoring and managing for you. Thus, average investors without much investing experience can invest conveniently.
  • Affordability
    Mutual funds usually only require a small amount for your initial investment. For example, GCash has an Invest Money feature in its platform that allows you to invest as little as Php 50.00 on different mutual funds based on your risk tolerance.
  • Liquidity
    Mutual funds are considered liquid (though not as liquid as stocks which can be traded daily and within seconds). Investors can opt to sell their shares in mutual funds at any time and receive their cash in a few days.

While this seems too good to be true, mutual funds also have their own setbacks. Below we provide you two major cons of mutual funds.

  • Extra Fees
    As we’ve mentioned earlier, mutual funds are professionally managed. Thus, you will have to pay that fund manager to do all the hard work for you. This fee is sometimes referred to as expense ratios which are the cost of managing the fund such as operating expenses and fund administration. This is usually a small percentage (usually around 1% to 3%) of the total value of the fund. Actively managed funds tend to have higher expense ratios than passively managed ones. Some funds also require additional fees such as transaction fees which you pay usually at redemption (which happens when you pull out or withdraw money from the fund).
  • Lack of Control
    Investing in a mutual fund is essentially hands-free and requires nothing from the investor except for their investment capital. While this feature attracts many beginner, average, and/or passive investors, it tends to be restricting for those who are not. Moreover, the types of assets and even companies that a mutual fund invests in might not necessarily be the investments that suit or are preferred by the investor. This means that investors have no say in what a mutual fund invests in.

After assessing these advantages and disadvantages, maybe you finally decided to try investing in a mutual fund. Yay! However, before you do, we must take a closer look at these mutual fund companies through their NAVPS.

Net Asset Value per Share

Think of a mutual fund as a company. Ownership of a mutual fund is divided into shares (seems familiar?) and each of these shares has its worth which is represented by its NAVPS.

Net asset value per share or, in short, NAVPS, is used to show the worth of one share of a mutual fund. Another way to think of NAVPS is the approximate amount that every shareholder of the fund is entitled to receive for every share they own if the fund liquidates or sells its assets and pays its liabilities now. The NAVPS fluctuates during the day since a mutual fund’s assets consist mainly of investments like stocks and bonds whose price fluctuates during the day. This NAVPS is somehow similar to a stock price but the difference is that a stock shows the value of a single corporation as reflected in the price while the NAVPS reflects the value of a basket of securities that the mutual fund holds like several company stocks and different types of bonds.

To obtain a mutual fund’s NAVPS, we divide the net asset value of a mutual fund with the number of outstanding shares. What is this net asset value though? Well this is basically assets minus liabilities. However, in this case, assets will include the market value, not book value, of the fund’s investments, cash, receivables and accrued income or income already realized but not yet received in the form of cash (here is a short read to know book value and market value). On the other hand, the liabilities will be composed of short and long term debt and accrued interests and other expenses of the fund. Take for example a hypothetical mutual fund called the ROI Fund. This mutual fund has PHP 10 million cash, investments with market value of 50 million, receivables worth PHP 5 million, and accrued income worth PHP 1.5 million. As for its liabilities, the ROI fund has PHP 2.5 million short term debt, PHP 3 million long term debt and accrued expenses of PHP 1 million. Based on this, we can see that the ROI fund has total assets of PHP 66.5 million and total liabilities of PHP 6.5 million. This gives a net asset value of PHP 60 million. If the ROI fund has 10 million outstanding shares, this means that the NAVPS of the fund is PHP 6. This means that if the ROI fund sells its assets and settles its liabilities now, each share will approximately receive PHP 6.

Why do you think this is important? Well, for beginners, when you buy a share of a mutual fund, you will pay the amount of the NAVPS plus front end fees for each share. Another thing is that the NAVPS is used as a measure of a fund’s risk or volatility. This is done by looking at a fund’s historical NAVPS, aka its NAVPS between a period in the past to its NAVPS now, to get an idea of a fund’s volatility. You can see below the graphs of the historical NAVPS of two mutual funds: the one on the left being an equity fund and the one on the right being a bond fund. You can see based on their historical NAVPS since their inception in 2008, the equity fund is more volatile given huge fluctuations in price as compared to the bond fund. However, this also proves that with higher returns comes more risk since the equity fund’s NAVPS reached higher prices at around PHP 4 while the bond fund only reached a high of around PHP 2.

Source: https://s3-ap-southeast-1.amazonaws.com/atram.com.ph/public/docs/Fund%20Fact%20Sheet%20-%20ATRAM%20Philippine%20Equity%20Opportunity%20Fund.pdf & https://s3-ap-southeast-1.amazonaws.com/atram.com.ph/public/docs/Fund%20Fact%20Sheet%20-%20ATRAM%20Corporate%20Bond%20Fund.pdf

You can also assess the performance of your mutual fund by comparing your historical NAVPS with the market, an industry benchmark or another fund with a similar, or nearly similar, investment mix. However, take note that historical NAVPS will only show past performance. Again, historical performance is not a guarantee of future returns but it can give you an insight of the level of volatility of a fund in the past.

Now that we have tackled what mutual funds are, we are now going to introduce you to the different kinds of mutual funds available in the market. There are 3 general classifications of mutual funds.

Equity mutual funds

As the name suggests, equity mutual funds buy stocks from a collection of companies, typically publicly traded ones. Sometimes, investors also call equity mutual funds as stock funds. As you probably have guessed, equity mutual funds are the riskiest among the mutual fund types discussed in this article. In a while, you will be introduced to the different types of mutual funds. But before that, you must remember that the main goal of any equity mutual fund is to invest in good companies with satisfactory returns (or even better!) and positive growth prospects at the right opportunity.

An equity mutual fund may be managed actively or passively. A passively managed equity mutual fund is called an index fund. On the other hand, an active fund is one in which a fund manager practices market timing (which is the practice of strategically buying and selling securities) in managing the fund.

An equity fund may also be categorized further based on geography. A domestic equity fund is a fund that exclusively invests in stocks where the issuer is based, such as its home country. To illustrate, a domestic equity mutual fund based in the Philippines would only buy shares from companies in the Philippines such as those found in the Philippine Stock Exchange. Opposite of that, is the international equity fund which solely invests in stocks from outside the home country of the issuer. For example, if the issuer of the international equity fund is based in the Philippines, it would only invest in stocks from countries aside from itself like Japan, the US, India or Germany. Lastly, a worldwide equity fund is a mutual fund that invests in stocks without any place restrictions. It’s portfolio can vary from stocks from different countries in different continents of the world (and even stocks from the issuer’s home country, too!).

Remember when we talked about value stocks and growth stocks in our stocks article? (If you haven’t checked it out then you are definitely missing out, read here.) Equity mutual funds can also be categorized based on investing style or what kind of stock they invest in. Value funds are mutual funds that attempt to find and invest in undervalued stocks such as those of your household brands like Coca-cola, Johnson and Johnson, and San Miguel Corporation. Growth funds, as you probably have guessed, invest in stocks with high or remarkable growth potential like the tech companies you know of such as Apple, Netflix, and BDO Unibank, Inc.

There are many other classifications for equity mutual funds, but we will stop here for now (information overload alert!). If you find yourself curious as to what other kinds of equity mutual funds exist, read this article.

Bond Mutual Funds

Bond mutual funds, a.k.a. bond funds or fixed income funds, invest in corporate or government debt securities. Its main purpose is to provide a steady stream of income to investors at a generally lower risk (and consequently, lower return) than individual bonds or equity securities. While bond funds are generally deemed safer than equity funds, it also faces some risk of its own that investors (or future investors) must be informed about. First, like the normal bond, bond funds carry a default risk which refers to the possibility of bond issuers that comprise the bond fund failing to pay back the borrowed funds. In addition, interest rate risk affects bond funds as well. When interest rates increase, the value of the bond fund declines. Here, we see that risks associated with bonds also apply to bond funds.

Like equity funds, there are also different kinds of bond funds in the market and in this article we are discussing three main kinds of bond funds. First on the list is investment grade corporate bond funds. Investment grade corporate bond funds are bond funds that invest in bonds offered by high quality corporations. How do we know if a corporate bond is investment grade? Investment grade bonds are determined by rating agencies such as Moody’s, Fitch Group and Standard & Poor’s. A bond is classified as investment grade if it has at least a rating of Baa by Moody’s, BBB by S&P and equivalents (click here to learn more about credit ratings).

Unlike investment grade corporate bond funds, high-yield bond funds invest in “junk bonds” or bonds that have low credit ratings or quality. As the name implies, this type of bond fund is riskier than investment grade corporate bond funds. So, why does this kind of bond fund exist? While this might sound unusual to you, what makes high-yield bond funds attractive is its high return feature. While it is a fact that its high return feature is a compensation for the high credit risk that the investor is taking, investors that seek higher returns and can stomach as much risk as their respective return needs find this bond fund very ideal.

Lastly, government bond funds are bond funds that invest primarily on bonds issued by or guaranteed by the government. This type of bond, unlike the previous two we have tackled, is considered to be very low risk and is actually the least risky among the three and therefore, has the lowest rate of return (getting curious? Check out our article on bonds here.)

Balanced Mutual Funds

As the title suggests, a balanced mutual fund or simply, balanced fund is a mutual fund composed of different kinds of asset classes. Because it invests in different asset classes, it is sometimes also called an asset allocation fund. It basically combines all the bond funds we have discussed above. Balanced funds are very popular to investors who are looking for more diversity in terms of securities included in the fund’s portfolio, lower risk, some income, and adequate capital appreciation.

Balanced funds aim to achieve a balance between growth and income. How do balanced funds achieve this? To help you understand how it works, first let’s dissect a balanced fund into two components: the equity element and the bond element. The equity element is in charge of ensuring that your money grows and helps you maintain the purchasing power of your money. The bond element, on the other hand, ensures an income stream and helps lower the volatility of the overall portfolio because of its innate stability relative to equities. Think of it this way, let’s say you planted tomato and mango in your garden. The tomato plant is able to bear fruit and is ready for harvest every 30 days. Your mango tree on the other hand grows and bears fruit in about 8 years. Consider your garden as your mutual fund. Your tomato plant which provides you with fruits on a monthly basis is like the bond element in your garden which provides you with a constant stream of fruits on a monthly basis while waiting for the mango tree, the equity element in your garden, to grow and bear lots of fruits in 8 years. Sometimes, balanced funds also invest in money market securities which also function to help provide stability to the portfolio by lowering its overall risk.

After knowing the general classification of funds, you must learn how to differentiate a mutual fund from other funds in the market. Generally, when people talk about investment funds, they pertain to three: mutual funds, UITFs and VULs. It is common for a mutual fund to be confused as a UITF or VUL due to certain similarities. Despite these, there are stark differences between these three and that’s what we’re gonna look into next.

Differentiating a Mutual Fund with UITF and VUL

First, we differentiate a mutual fund with UITF. A UITF, or a unit investment trust fund is substantially similar to a mutual fund in such a way that it pools funds from public investors for the purpose of investing it in different investment securities. The main differences between these are what you’re buying and who manages a mutual fund or UITF. When you purchase a mutual fund, what you are buying are shares of the mutual fund company which is managed by in-house fund managers. As a consequence of being an entity, it is regulated by the Securities and Exchange Commission and required by it to submit annual reports for the protection of investors. As for UITF, this is not a company; rather, it is a fund that a financial intermediary manages. As such, when you purchase UITF, you don’t buy shares, you buy units of participation in that fund. Also, while mutual funds are measured using NAVPS, UITFs are measured using the NAVPU or net asset value per unit. The main advantage of mutual funds over UITF is that the gains from selling a share in a mutual fund are tax-free while there is a 20% withholding tax from your gains in a UITF. The disadvantage though is that mutual funds usually have larger management fees since sales charges are rarely seen in UITFs (see this to know more about UITFs!). As such, when you buy a share of a mutual fund like the Philequity PSE Index Fund Inc., expect to buy a share of a mutual fund corporation at a price based on its NAVPS. On the other hand, when you buy a UITF like the UnionBank Long Term Fixed Income Portfolio, you will be buying a unit of participation in a fund managed by a bank at a price based on its NAVPU.

Next, we go to the similarities and differences of mutual funds and VUL or variable universal life insurance. One key difference between the two is that VUL offers life insurance alongside its investment feature. Basically, when you pay for a VUL, a portion is used to pay for insurance premiums while the rest is put in separate accounts where each account indicates where that money will be invested. The insurance feature of VUL, which differentiates it from a mutual fund, makes VUL more expensive than mutual funds since you also need to pay premiums for the insurance. The risk with VUL, as compared to traditional insurance, is that the insured carries the risk of loss of the investment fund. If the investment fund experiences sustained or significant losses, the insured may need to pay higher insurance premiums in the future to recover the investment fund and cover insurance costs that cannot be covered due to the insufficient balance of the fund. As for its advantages, VUL is good if there are people depending on your income and you need insurance in case the worst happens to you (you know what I mean?). On the other hand, if you just want to invest, better to go with mutual funds (click here to know more about VUL!).

How exactly do you earn when investing in mutual funds?

This part of the article tackles ways in which investors earn from mutual funds (exciting, right?). How an investor earns from mutual funds depends on the kind of mutual fund he or she invests in. That means that investors of an equity fund would mostly earn from capital appreciation and also from dividends. Bond fund investors earn from interest payments. Balanced fund investors enjoy the benefits of earning from both bonds and stocks. While these are the ways in which you can earn from mutual funds, we’ve rounded up small (and cute) tips in the following paragraph.

As we’ve mentioned earlier in this article, extra fees can serve as a turn-off for an investor that is why it’s important to know your costs before investing in a mutual fund so you are able to maximise your money. It is also advised to keep a mutual fund investment for the medium to long-term to help address market volatility. This is because mutual funds won’t necessarily show high returns in the short run, especially if you have only invested a small amount.

Now that you know what a mutual fund is, the different kinds of mutual funds and the most common ways to earn from it, let us introduce you to some mutual fund currently available in the Philippines.

PH Mutual Fund

To get a real feel of the Philippine mutual fund market, here are five examples of mutual funds that, hopefully, will get you interested to start investing in mutual funds.

Philequity PSE Index Fund, Inc.

The Philequity PSE Index Fund, Inc. is a growth-oriented mutual fund that is invested in PSEi stocks, an index of 30 blue-chip stocks which is being used as a benchmark of the PSE’s overall performance. As an effect, this fund moves generally with the PSEi. According to Philequity, this fund is ideal for “investors looking for long-term capital appreciation but do not have the expertise and resources necessary to mirror the PSEi.” See below for the historical NAVPS graph of this mutual fund.

Image taken from https://www.philequity.net/ppse.php?mode=Snapshot

First Metro Save and Learn Equity Fund, Inc.

This equity fund, managed by First Metro Asset Management, is for aggressive investors who seek high growth and diversification. The stocks in this mutual fund have strong valuations that have high probabilities to lead to capital appreciation in the long run. As such, those who invest here must have a long horizon or have a lot of time to have their cash invested in the fund. Check their historical NAVPS below!

Image taken from https://fami.com.ph/mutual-fund/save-learn-equity-fund/

Soldivo Bond Fund, Inc.

This is a bond fund that is for conservative investors as it is mostly invested on high-grade government fixed income securities (around 80% as of July 2020). Given this sort of risk, the expected returns from this fund are not as high as equity funds. Its main objective is to provide capital preservation — making sure that your money is growing at a rate equal to or faster than inflation. Look at the image below for their NAVPS graph from inception in 2014 to October 2, 2020.

Image taken from https://s3-ap-southeast-1.amazonaws.com/atram.com.ph/public/docs/Fund%20Fact%20Sheet%20-%20Soldivo%20Bond%20Fund.pdf

Cocolife Fixed Income Fund, Inc.

Managed by Cocolife Asset Management Co., Inc., this bond fund is an income-oriented one. This means that most of the returns of this fund will come from regular interest payments from its holdings of corporate bonds, government securities and other fixed income securities. Given this, the fund is suitable for investors seeking capital preservation and a liquid investment. Looking at its NAVPS graph below, the trend shows that this mutual fund has very low risk due to very low volatility.

Image taken from https://www.cocolifeasset.com/mutual-funds/cfifi/

PAMI Horizon Fund, Inc.

Pami Horizon Fund, Inc. is a BPI-managed balanced fund with 45% of its assets invested in equities and around 59% in fixed income securities. Given this asset allocation, it can be said that this fund is for moderate investors who seek capital appreciation but don’t want to take too much risk since the high risk in equity securities were balanced by the lower risk of fixed income securities.

Image taken from https://www.philamfunds.com/en/our-products/balanced/pami-horizon-fund.html

Hello! You still there? If yes, well, I’d like to applaud you for going this far ’cause that was really quite a read. But I know that your effort is not wasted because after reading all of that, you now surely know a great deal about mutual funds.

If you’re keeping track of UP JFA’s Pisopedia, I’m sure that you are now knowledgeable about stocks, bonds and mutual funds. If you want to add more to that, make sure to watch out for our next article on cryptocurrencies. Well, that’s it for the week. See ya!

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UP JFA Pisopedia

Pisopedia is an online learning platform for Filipino students to learn more about personal finance.