Making money work hard using mutual funds.

Philippine Daily Inquirer

The recent global financial crisis has taught investment-savvy Filipinos one valuable lesson: Find other ways of saving up for the future.

And today, more and more Filipinos are beginning to find mutual funds as a viable alternative investment instrument and with reason.

The ability of mutual funds to provide returns higher than inflation and other traditional deposits makes it a wise investment option.

Still, while some have begun to appreciate the rewards of investing in mutual funds, others have yet to discover it.

Mutual funds defined

A mutual fund is an investment company that pools money from numerous investors and in exchange, issues corresponding shares to the latter. The pooled funds are then invested by professional fund managers in various securities according to the investment objectives and policies of the fund.

The investment is aimed at increasing the value of the fund and consequently, the value of the shares of its investors.

While there are no guarantees, its growth potential is limitless.

The concept of mutual fund in the Philippines is not all that new.

It first came to be in the early 1950s but its existence was short-lived due to scams that hounded the industry then.

The absence of stringent regulations at that time led to such practices as the charging of exorbitant fees and sales loads, making it very difficult for some investors to break-even.

So, when the stock market fell in the late 1950s, the mutual fund industry crumbled. Three of the four companies closed and the only one left eventually shifted its business.

In response, the government later enacted the Investment Company Act (Republic Act No. 2629), which contained stringent laws that in turn hampered the revival of the industry.

It was only in 1969 when Trinity Shares registered its business and made mutual funds available to the Philippine market again.

With the success of Trinity Shares in terms of its sales growth and fund performance, two other fund companies soon followed suit.

During this time, however, the mutual fund industry was very heavily dependent on the equities market for lack of other instruments to invest in.

So when the First Quarter Storm came and all the political instability led to a stock market drop of 30 percent in the 1970s, the mutual fund industry also fell.

But that was not the end of mutual funds in the Philippines.

Rebirth

The SEC in 1989 attempted to revive the industry by coming out with implementing rules and regulations of the Investment Company Act, meant to protect the interest of mutual fund investors. And so, mutual fund companies were on the rise again.

Today, with necessary controls and regulations in place, the mutual fund industry has regained investor confidence. There are now 41 mutual funds in the market with over P60 billion in assets under management as of April 2009.

Not just about money

While the returns of the funds are slowly picking up in the aftermath of the financial crisis, it is wise to say that, “It’s not always about the yield. When investing, one needs to look for three things, at least: Yield, Safety and Liquidity.”

Diversification is another inherent advantage of investing in mutual funds.

The more instruments one has in his investment portfolio, the better protected are his investments.

In mutual funds, a minimal investment can give the investor access to a wide range of securities precisely because his money is pooled with the money of others.

With a mere P10,000, one enjoys the benefits of mutual funds.

Investing in mutual funds also allows investors to benefit from the expertise of professional fund managers who have the research capabilities, skills, knowledge, experience and commitment that allow them to decide when and what securities to buy and sell so as to yield the best possible returns to the fund and its shareholders.

Some mutual fund companies offer free inter-fund transferability feature. This is so because of the fact that investors’ needs, preferences and investment objectives may change, so companies allow investors to shift their investments among certain funds up to four times a year, free of charge.

The world of mutual funds is indeed growing and opening up.

More and more investors are slowly realizing why mutual funds are a viable investment option.

After all, who would not want the limitless growth potential? And while they say returns are proportionate to risk, it is clear that there are enough safeguards to protect the mutual fund industry.

(This financial literacy piece was prepared by Sun Life Financial-Philippines in partnership with the Inquirer.)