Advantages of Investing in Mutual Funds

When it comes to investing in the stock market, financial and investment advisers will always caution potential investors that before they place their hard-earned money therein, they should first be all-SET. This means that they should have the Size of funds, Expertise and Time. However, even though a potential stock market investor may not be all-SET, there is still an alternative paper asset that one can invest in — Mutual Funds. Below are the advantages of investing in mutual funds according to the Philippine Investment Funds Association (PIFA) and the Securities and Exchange Commission (SEC) along with my additional comments:

1. Professional Management

One of the main attractions of mutual funds is that it affords its investors, particularly the small ones, the services of full-time professional managers whose job is to analyze the various investment products available in the market and select those that would give the best possible returns to the fund and its shareholders.

2. Low Capital Requirement

Direct investments usually require substantial capital. The minimum investment amounts for Treasury Bills and Commercial paper, for instance, range from P100,000 to P1,000,000 depending on the bank or investment house you are dealing with. This also holds true for stock because while you may be able to buy one “lot” (shares are sold in board lots ranging from 10 shares to 1 million shares depending on the price at which these shares are traded) for as low as P1,000 or P5,000, you may not be able to buy the stock that you really want, especially the blue chip and growth stocks.

3. Diversification

There is a saying that goes, “Do not put all your eggs in one basket.” This adage is especially true in the world of investments which is full of uncertainties. In fact, even King Solomon, the wisest king who has ever lived, said, “But divide your investments among many places, for you do not know what risks might lie ahead (Ecclesiastes 11:2, NLT). There is no such thing as a “sure” thing. An important investment principle that requires holding several securities to reduce the risks associated with investing in individual securities is called diversification. When you invest in a mutual fund, you achieve instant diversification because the fund is required by law to be invested in a wide array of issues and/or securities.

4. Liquidity

Liquidity is the ability to readily convert investments into cash. Other investment products require you to find  buyer so that you can liquidate your investments. That is not the case with mutual fund shares because the fund itself stands ready to buy back these shares at the prevailing Net Asset Value Per Share. While the law provides that redemption proceeds must be given within seven (7) banking days from the date of the redemption request, most funds are able to pay the redemption proceeds within the next day. Mutual Funds are, therefore, considered very liquid investments.

5. Safety

Safety is a very important consideration for most investors. Mutual funds are highly regulated by the Securities and Exchange Commission under the Investment Company Act and its Implementing Rules and Regulations. Mutual funds are prohibited from investing in particular investment products and engaging in certain transactions. They also have to  submit regular reports to  the SEC as well as to their shareholders.

6. Potentially Higher Returns

Because a mutual fund is managed as a single portfolio, it is able to take advantage of certain economies of scale. For instance, with its millions of pesos (or other currency) under management, it can negotiate for lower stockbrokerage fees or higher interest rates on fixed-income instruments. In the end, however, it is still the investment company adviser who really makes the big difference when an individual is faced with this decision — “Will I make direct investments by myself or will I invest in a mutual fund?” Because very few individual investors can match the experience and skill of full-time professional fund managers, the investing public is well advised to invest in a mutual fund instead.

7. Convenience

Mutual funds are purchased directly through SEC-licensed Certified Investment Solicitors (CIS) only. These CIS are usually connected to banks, insurance companies, investment companies, or brokerage firms and normally provide personal, tailor-fit service. Some fund companies have even set up retail centers for investors. Many have payroll deduction plans and some funds, with proper authorization, will deduct and invest on a regular basis a specified amount from the shareholder’s bank account.

Funds offer a variety of services, including preparing monthly or quarterly account statements, automatically debiting additional investments from, or crediting redemption proceeds to, the investors’ bank account; or allowing transfers from one fund to another. Most major mutual fund companies offer extensive record-keeping services to help investors track their transactions and follow their funds’ performance via phone, text message, or the internet.

8. Transparency

Investment company advisers (such as Philam Asset Management, Inc.) provide investors with updated information pertaining to the fund. All material facts are disclosed to investors as required by the SEC.

9.  Flexibility

Investors are allowed to modify investment strategies over time by transferring or moving from one fund to another within a mutual fund family.

Investment 101

This time of year, many people think about freedom and what it means to them. We’d like to go one step further and ask that you consider your financial freedom. Imagine being financially free to live the life of your dreams and be in complete control of how you spend your time. Start today by asking yourself two simple questions:

Are you close to being financially free?

If not, do you have an action plan to get there?

If you didn’t answer an affirmative “YES” to either one of those questions, now is your time to take action. The reality is that you must have a plan if you want to achieve financial freedom. Without a plan you’ll likely never get to where you are going and could potentially waste a great deal of time and money in the process. The good news is as long as you make the decision to ACT TODAY you can begin taking steps towards financial freedom – and we can help!

Just gather at least 20 of your officemates, churchmates, classmates, friends, or relatives and we will come to you!

Investment 101

What is a VUL and Why is It a Good Investment?

I have read some blogs of certain financial experts advising people not to buy or invest in a VUL insurance because of the high charges that can eat up their account value (No. of units x NAVPU) and that people should instead buy a term insurance, which is significantly cheaper, and invest the difference in stocks, mutual funds, UITFs or ETFs. Other arguments against VULs is that it is only for those who are lazy to learn about investing themselves and that people who reach a ripe old age no longer have any young children or dependents to worry about when the call of death arrives.

While these seem like valid objections, however, there are some very important things about VUL insurance products that these writers have failed to consider. But before I proceed to address these issues, let me first define what a VUL is. VUL stands for Variable Unit-Linked/Variable Universal Life. According to Investopedia, a VUL is “A form of cash-value life insurance that offers both a death benefit and an investment feature. The premium amount for variable universal life insurance (VUL) is flexible and may be changed by the consumer as needed, though these changes can result in a change in the coverage amount. The investment feature usually includes sub-accounts  (pooled funds) which function very similar to mutual funds and can provide exposure to stocks and bonds. This exposure offers the possibility of an increased rate of return over a normal universal life or permanent insurance policy.” As Mr. Rienzie Biolena, RFP, puts it: “It is an investment and life insurance product in one. The difference between a VUL and other forms of life insurance is that part of the premiums is invested in pooled funds which, in time, are expected to grow in value.

Now, for my observations: First, you cannot make withdrawals from your term insurance because it does not have cash value unlike Whole Life and VULs which have cash/account value and can therefore also serve as your savings “account” in the case of the latter. Hence, the only way for an insured to enjoy his purchase is that if he or she dies during the term of the policy, which, in this case it is not really the insured who enjoys it but the beneficiaries. Second, according to Mr. Randell Tiongson, RFP:  “It is interesting to note that less than 20 percent of term insurance policies are still in force when the insured dies and, therefore, never pay a claim.” Third and most important of all, since the death benefits of a VUL, which include the amount invested in the pooled funds, is still classified as insurance, the proceeds thereof are excluded from the computation of gross income [Section 32(B)(1), National Internal Revenue Code of 1997] and gross estate [Section 85(E), Ibid] thereby exempting it in effect from taxation, provided, that the assignment of beneficiaries is irrevocable. Unfortunately, the same does not hold true for gains derived from investing in mutual funds, stocks, unit investment trust funds, or exchange traded funds, because in case of the death of the investor, such gains, if any, including the principal amount shall still form part of the gross estate and therefore subject to estate tax. And the worst part is, once the bank or financial institution finds out about the death of their depositor or investor, such funds are mandated by law to be frozen until payment of estate taxes is completed. That is why, as discussed in one of my previous blogs, life insurance, particularly VULs, is an indispensable tool in estate planning.

As a side note, there are VUL products, such as Philam Life’s Money Tree, that while providing minimal guaranteed life insurance coverage, has virtually the same rates of return as mutual fund investing. Maybe the writers criticizing VULs as a whole were not aware of the existence of VUL products such as the Money Tree or were greatly misinformed. As I conclude, remember that prior to investing, it is important to know your needs and goals before handing in your hard-earned money and diversify! As the wise teacher said: “Invest what you have in several different things. You don’t know what bad things might happen on earth.” (Ecclesiastes 11:2, ERV)