Getting started with Mutual Funds in the Philippines

This October, I started investing in First Metro Assets Management Inc. I chose Save and Learn Equity Fund (SALEF); the minimum amount to invest is P5,000.

From the word itself "mutual", meaning it's shared. Mutual Fund is a collection of funds gathered from investors which is then handled by a manager. The manager is called "fund manager". The idea is that you are entrusting your money to a person who is, in most cases, more knowledgeable than you are in investing it to different security options like stocks, bonds, etc.

The advantage of this is that your money belongs to a pool which is big and has a buying power far greater than yours. This means that the investment is diversified and has greater potential to earn more. This is realized more if you don't have a huge amount of money to invest (e.g. you're starting with 5,000 Pesos). Your money is basically riding on the collected funds. Another advantage is you don't have to worry about it minute by minute or even day by day since you're not the one managing the fund.

The disadvantage of this is, also, your money belongs to a pool handled by a fund manager. You are at the mercy of the manager's decision where he/she will put the money. You can only hope for the best. Also, I read somewhere that with the huge amount of money that the fund manager is handling, he is forced to buy bigger options which are not always the best option to earn money.

In the Philippines, there are four types of mutual funds:

1. Stock / Equity Funds
   The fund manager will invest your money in Philippine Stocks. Among the types of mutual funds, this has the highest potential to earn, but at the same time you can also lose big like when the US market crashed in 2008 and the Philippines was also affected.
   
   The risk is high when you invest in stocks, but the risk can be mitigated when you equip yourself with knowledge. In general, people invest in stocks when the market is bullish. A bull market means that stock prices are expected to rise, this usually happens when the economy is good like what's happening now in the Philippines (as of October 2012). Now would be a good time to invest money in this option, but when you invest in this option, be prepared to lose big.
   
   Personally, since I'm still starting, I placed an amount that I'm willing to lose. But I plan to allocate a percentage of my savings each month in this vehicle to build my financial portfolio.
2. Bonds / Fixed Income
   In this type of mutual fund, money is invested in bonds or other debt instruments. Para ka lang nagpapautang. The fund manager will look for opportunities to lend money, like when the government, large corporations, banks, etc need money. The income in this type of investments are fixed, and interests are lower so the potential to gain big is lower compared to stocks.
   
   When the economy is sloppy, which usually means stocks are down, investors resort to investing in bonds so they still earn while they wait for the economy to pick-up. Since the risk in bond funds are lower, it's safer to put larger amount of money in this option.
   
   I'm about to put some my money here. My finance mentor advised me to park some of my emergency fund here instead of placing it all in my bank's savings account.
3. Balanced 
   Balanced fund is a mixture of stocks and bonds fund. The manager invests some of your money in stocks, some in bonds. I think the fund manager also decides whether to allocate a larger percentage to stocks or bonds depending on the market's situation. The advantage here is you don't have to worry much whether to invest in bonds or in stocks because it is decided for you. The risk of losing big is lowered compared to a mutual fund invested in pure stocks.
   
   If this is the case, why not always place your money here? The potential gain is still lower than that of equity, because a percentage of your money is invested in bonds.
4. Money Market
   Money market is similar to bond, the only difference is that your money is invested in fixed-income securities that has shorter maturity period like government T-bills or commercial papers (usually having a maturity period of less than a year).
   
   Among the types of mutual funds, this has the lowest risk but also has the lowest returns. Personally, I'd go for bonds than money market unless it can outperform bonds.

Let's take a look at an actual returns of the different type of funds. I will use FAMI as an example since this is the one I invested in (I'm not affiliated with FAMI or Metrobank in any way):

Type of Mutual Fund	Year to Date return as of Oct 18, 2012	How much money have you earned if you put P100,000 last January 1, 2012
Equity	23.01%	P123,010
Bond	5.08%	P105,080
Balanced	20.55%	P120,550
Money Market	1.71%	P101,710

It is encouraging to see that equity/stocks of FAMI has 23% return, but as many always say, past performance is not indicative of future results. As expected, the money market with the lowest risk has the lowest gain among the four types of MF.

In the next entries, I will write why I chose FAMI to handle my funds, and more on getting started with investments like other investment options including UITF, stock trading, etc and how much to put in each type of investments you choose.

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Source:
http://en.wikipedia.org/wiki/Mutual_fund
http://www.pinoymoneytalk.com/introduction-to-philippine-mutual-funds
http://www.investopedia.com/ask/answers/10/mutual-funds-advantages-disadvantages.asp