SAVING builds what we have. Investing grows what we have. Making the most out of money we earn is made possible through investing. There are various investment options available.
One such option would be pooled funds. These are funds that are accumulated from money that is put in by many investors for investment purposes. In the Philippines, the two popular types of pooled funds are mutual funds and unit investment trust funds. While these funds share many similarities, they also have certain differences.
A mutual fund is managed by a company and is regulated by the Securities and Exchange Commission. Opening an account must be done through a licensed representative of a mutual fund company. The usual minimum investment amount is around P5,000. There is a usual minimum holding period of six months. Fees and charges that are common with mutual funds are related to opening, management, sales and redemption. Gains or losses are measured by changes in the fund’s net asset value per share or NAVPS.
A unit investment trust fund, more commonly known as UITF, is managed by a bank and is regulated by the Bangko Sentral ng Pilipinas. Opening an account must be done through a trust representative of the bank. The usual minimum investment account is around P10,000.
There is a usual minimum holding period of 90 days. Fees and charges that are common with the UITFs are related to trust, sales and redemption. Gains or losses are measured by changes in the fund’s net asset value per unit or NAVPU.
Investors have different risk tolerance levels. Risk refers to the volatility in returns during the investment horizon.
For investors who are risk-averse, pooled funds that invest money in the money market and the bond market would be recommended. For investors who have a moderate tolerance for risk, a balanced pooled fund would be recommended. For investors who have an aggressive tolerance for risk, pooled funds that invest in the stock market would be recommended. Higher risk means higher required returns.
Pooled funds have a host of advantages and disadvantages. One advantage of investing in pooled funds would be convenience. Many individuals do not have the time to actively manage investments. They can benefit from the expertise of fund managers who regularly analyze the markets.
Another advantage of pooled funds would be the lower initial investment costs as compared to investing in real estate or in business. Another advantage would be the prospect of getting higher returns as the economy thrives.
Pooled funds have disadvantages. One disadvantage is that returns are not guaranteed. Returns depend on how favorable or unfavorable market conditions will be. Another disadvantage is that there are fees and charges. Another disadvantage would be the possibility of not fully maximizing returns. If the fund managers decide to invest in instruments that have high correlation, the returns are adversely affected.
Are pooled funds for everyone? Yes.
However, there are certain imperatives that have to be considered. The goal has to be defined and has to be clear. Examples of goals would be sustainable retirement and asset purchase. Liquidity is important so ample saving levels and emergency funds should be present to ensure investments would be sustainable. Having a heightened sense of financial literacy and doing due diligence are necessary. Studying past and current performance of funds aids in making the right decisions.
Pooled funds offer many benefits for investors but these are not perfect. There is no perfect investment anyway. What is important is for one to always be reminded about the financial goal. Investing in pooled funds should be anchored on a goal and should be an effective and efficient way of ultimately achieving the goal. As the goal is achieved, a better future in terms of financial freedom becomes more imminent.
Genesis Kelly S. Lontoc is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 78th RFP program in September 2019. To inquire, e-mail firstname.lastname@example.org or text <name><e-mail> <RFP> at 0917-9689774.