MANILA, Philippines – Let’s face it: Investing in stocks is hard. Although we’ve covered the basics of the stock market, choosing which one to choose from the nearly 300 publicly listed companies can be overwhelming.
Want to invest heavily in media? Are the real estate developers behind the malls and condominiums springing up around the country? Maybe you want something smaller: fresh meat vendors, coffee chains or fruit shake kiosks?
Knowing the ins and outs of all those industries is already a job in itself. After that, you still need to know how the company you’re looking at is doing in that industry and what their future financial performance looks like. Then you still have to decide when is the best time to buy and sell the stock. How does the average investor have time to deal with all this?
“You have to study the market yourself and know where to invest. If it’s in stocks or bonds, you have to know which company or which issuer to pass,” says attorney Rene B. Bettita, independent director of Manulife Investments and professor of finance at De La Salle University. Rappler Beta has been in the loyalty industry for over 25 years.
Fortunately, there are other options that allow you to invest in stocks while benefiting from expert management. They are called Mutual Funds and Unit Investment Trust Funds (UITFs).
Let’s divide them.
What are these funds?
Portfolios of mutual funds and UITFs can access everything from stocks, bonds and foreign currencies. Here, we will focus on equity funds or mutual funds and UITFs that mainly hold stocks.
But first, here’s a useful summary of stocks. Remember, stocks represent an ownership interest in a company. To get that piece of ownership, an investor buys the company’s stock. Investors normally trade with a stockbroker, who acts as an intermediary connecting investors to the Philippine Stock Exchange (PSE), an organized marketplace where stocks are traded.
So how do these equity funds come into the picture? Instead of investing individually, investors pool their money into a mutual fund to achieve a specific investment objective. The fund manager uses this large amount of cash to invest in a diverse portfolio rather than investing in just one stock.
“With a mutual investment plan, there’s a portfolio manager who does everything for you,” says Betita. “For a beginner investor, it means you don’t need to really know or study the market, or look at the inherent risks because those things will be explained to you by anyone trying to get your investment. “
“All you have to do is decide which fund to invest in and then your returns, and it’s up to you when to return,” he added.
If you want to invest in an equity fund, the process is often similar to how you invest in the stock market. But this time, instead of buying a share of a PSE-listed company, you are buying a share or class of an equity fund that you want to join. The value of this share or unit is known as the net asset value per share or unit. It will go up and down depending on how the currency and the stocks in it perform.
Now that we understand what these funds are in general, what is the difference between a mutual fund and a UITF? Actually, not much. The biggest difference is the management of the fund. Mutual funds are managed by investment and insurance companies, which are regulated by the Securities and Exchange Commission. Meanwhile, UITFs are managed by trust entities, mostly banks, controlled by Banco Central ng Pilipinas. Apart from the control differences, the two work in a comparable way.
Money for every investor
So what makes investing in these funds better than individual stocks? There are two main reasons: customized portfolios and diversification.
For starters, remember that every mutual fund and UITF is guided by a declared investment objective. A fund can choose the type of investments it carries to reflect its level of exposure. You can list specific areas of focus, such as healthcare, technology or infrastructure.
“Suppose you only want to invest in blue chip securities. There is a fund for that. Do you want to invest in small speculative investments? There are funds for that. If you want to invest in a real estate investment trust outside the Philippines, there are funds for that,” Betita said.
This means that if you are a risk taker, you can invest in an aggressive fund that acquires volatile but promising stocks. On the other hand, you may want to invest in environmental, social and governance funds. The bottom line is that mutual funds and UITFs save you the tedious process of researching and building your own portfolio as a beginner investor.
Expanding your portfolio
This brings us to diversity. Knowing which stocks are right for you is not only difficult, but also expensive. Because even if you want to diversify by buying many shares, you cannot buy just one share of each stock.
Like other stock exchanges, the PSE has a board lot system. To start investing in a company, you need to buy a small amount of stock, which varies depending on the market price of the stock.
For example, if you want to invest in a company whose stock price is P0.50 per share, you need to buy at least 1,000 shares. With these minimum investment requirements, diversifying a portfolio that reflects the PSE index, for example, takes a lot of capital.
Mutual funds and UITFs eliminate this stress. When you buy a share or unit of a fund, you get a portion of the total investment portfolio. And it’s a much more affordable form of diversity. For example, some index funds allow you to invest as little as P1,000, and that allows you to track the performance of each stock in the PSE Index (PSEi).
“There are funds that allow initial placements of up to P1,000, and it gives the small investor access to high-quality securities that would normally be out of reach for someone with something under P100 million,” Betita said.
How do I start?
Here are some general considerations when choosing a fund to invest in.
- Set your goals. Before looking for a fund, you need to know what you want to get out of your investment. Specify the amount you want to risk and your time horizon. Since mutual funds and UITFs are primarily invested in stocks, these funds usually recommend a time horizon of at least three to five years to see good returns.
- Pay attention to your risk profile. This will help you choose what funds and underlying investments to choose. Most mutual funds and UITFs will have disclosures and risk assessment tests to help you decide if the fund is right for you.
- Know the techniques of the fund. Required minimum initial investment amounts vary between funds, as do minimum increments. Also note the minimum holding period, early redemption fee and annual management fee. You can find these technicalities in detail in your mutual fund’s fund fact sheet or in your UITF’s Key Investment and Information Disclosure Statement.
- Select your fund. When choosing a fund, Betita advises beginners to focus on the institution’s reputation and historical performance, although this cannot predict future success. When deciding between mutual funds and UITFs, keep in mind that some mutual funds charge upfront fees that banks don’t.
- Open an account. Once you’ve chosen your fund, it’s time to open an account. This usually requires visiting the financial institution in person. Because of this, opening a UITF account is easier than a mutual fund account as banks have many branches. Opening a UTF account if you have a relationship with a bank can also reduce the amount of paperwork you have to fill out.
While mutual funds and ETFs benefit from diversification, they still carry risk. For this reason, Betata advises investors to start with a fund that focuses on what they already know. For example, jumping directly into a fund that invests in foreign securities adds another risk to foreign currency fluctuations.
Always remember that your returns may vary and there is no guarantee that fund managers will consistently beat benchmarks such as the PSEi. Investors who want more control over their portfolio can opt to open a stock brokerage account instead. – Rappler.com