Why is Mutual Fund Investing Level 2?

Last week week we covered why we call Kaiser Long Term Healthcare as Level 1 Investing. You can review this on this page : Kaiser Level 1

When we define our Personal Financial Strategies (PFS) after the BPM (Business Presentation) we were told about the three levels of investing. Kaiser is Level 1 and Mutual Fund is Level 2. So let me share about Mutual Funds and Why I consider this to be a Level 2 Investing. 

I. What is A Mutual Fund?

For so many years Mutual Funds has already existed but not so many people still know about this. The oldest Mutual Fund I know started in the early 90's (1993). This is the Philequity Fund Inc (PEFI).  In the Philippines as of September 30,2010 there are 43 Listed companies in the Philippine Investment Fund Association (PIFA). 

But what exactly is a Mutual Fund? On the (RSA)- Rampver Strategic Advisors page it defines Mutual Funds as:

	"- Are investment companies that pool money from numerous investors, with the same investment objective.  Through the issuance of its shares to the public, the pooled funds are then invested by professional fund managers in a diversified portfolio of securities or investment instruments. - Shareholders are entitled to a proportionate share in investment income and risk exposure. - Mutual funds are registered and regulated by the Securities and Exchange Commission (SEC). - Since mutual funds are not bank products, they invest only in marketable securities and therefore do not need to be covered by the Philippine Depository Insurance Corporation (PDIC). - To safe guard and protect the interests of the investing public, mutual funds also follow investment guidelines set by the SEC, that includes investment restrictions." Read more about it on this page Rampver The Philippine Investment Fund Association definition of a Mutual Fund:" is an investment company that pools the funds of many individual and institutional investors to form a massive asset base.    The assets are then entrusted to a full time professional fund manager who develops and maintains a diversified portfolio of security investments.  People who buy shares of a mutual fund are its owners or shareholders.  Their purchases provide the money for a mutual fund to buy securities such as stocks and bonds.   A mutual (fund) can make money from its securities investments in two ways: a security can pay dividends and interest to the fund, or a security  can rise in value.  The fund passes any dividends, interest or profits on the sale of its portfolio securities, less fund expenses, to shareholders in the form of distributions.  In the Philippines , there are currently four basic types of mutual funds---stock (also called equity), balanced, bond and money market funds.   Bond funds invest primarily in bonds such as treasury notes issued by the Philippine government and commercial papers issued by reputable companies in the Philippines .  Having a full basket of only fixed-income securities, bond funds provide capital preservation while maintaining a conservative stance in terms of asset allocation.    Like bond funds, money market funds also have a conservative stance since they have a full basket of fixed income funds.  The main difference lies in the term of investments of money market fund investments, which is one year or less.   Equity funds invest primarily in shares of stock issued by Philippine corporations.   The dominance of stock issues within the portfolio positions the fund to attain a more aggressive rate of growth.    Balanced funds invest in both shares of stocks and bonds, thereby accessing the growth potential of stocks tempered with the presence of secure fixed-income instruments.    Professional fund managers create value for shareholders by providing superior yields within controlled risk exposures.   Certainly, both security selection and asset allocation go a long way in ensuring better long-term rewards for mutual fund investors. As of September 30, 2010, there are a total of 43 mutual funds in the country, broken down as follows:" Category    Equity Funds (PhP)      8 Equity Funds (USD)     1 Balanced Funds (PhP)  7 Balanced Funds (USD) 1 Bond Funds (PhP)      10 Bond Funds (USD)      9 Bond Funds (Euro)      2 Money Market (PhP)  5  TOTAL:                     43   Learn more about it on this page PIFA II. What are the Mutual Fund Companies in the Philippines and Their Performance? There are 43 Mutual Fund companies and they offer varied types of funds as discussed above. Of these 43 there are 8 listed Equity Fund Providers with 10 Different Kinds of Fund Names of which 9 are Peso denominated and 1 Dollar Fund: Fund Name NAV Per Share 1 yr. Return (%) 3 yr. Return (%) 5 yr. Return (%) YTD Return (%) N.A.V. History Stock Funds     Primarily invested in Peso securities ATRKE Alpha Opportunity Fund, Inc.* *** 1.3869  n.a.  n.a.  n.a.  14.95%  History ATRKE Equity Opportunity Fund, Inc.* 3.8901  29.35%  26.47%  15.32%  10.31%  History First Metro Save and Learn Equity Fund,Inc.* 5.3724  30.35%  35.64%  24.3%  11.76%  History Philam Strategic Growth Fund, Inc.* 568.88  28.97%  30.54%  20.13%  13.42%  History Philequity Fund, Inc.* 32.9877  37.74%  35.16%  23.53%  15.48%  History Philequity PSE Index Fund Inc.* 4.3257  34.32%  29.57%  19.25%  13.98%  History Philippine Stock Index Fund Corp.* 742.27  38.21%  30.37%  17.56%  15.65%  History Sun Life Prosperity Philippine Equity Fund, Inc. 4.0587  37.62%  29.62%  17.95%  13.62%  History United Fund, Inc.* 3.5911  24.16%  15.18%  11.75%  10.02%  History     Primarily invested in foreign currency securities ATR KimEng AsiaPlus Recovery Fund, Inc.** $1.0135  5.42%  n.a.  n.a.  3.94%  History The Top 3 Performers in the last 5 years are: FAMI- Top 1, PEMI- Top 2, and PAMI- Top 3. We take pride that these companies are partner companies of IMG through RSA. Check their web page and see more information about them. This Mutual Fund is really for Long Term Goals which is from 5 years and beyond. III. So Why is this Seemingly Good Investment Vehicle Level 2? I would go back to the three (3) investment vehicle levels based on the Risk Return Trade Off. Between Kaiser and Mutual Fund, the Mutual Fund yielded a higher Rate of Return  as you can see on the last 5 Year Performance. Mutual Funds have returns that are relatively high at double digit returns in the last 5 years for the Peso denominated funds. Along with this high return is the fact that it entails higher risk. Why? Because there will be a continuous up and down motion of the values of the fund (commonly called as Net Asset Value Per Share-NAVPS). Unlike Kaiser which is  fixed income investment you are guaranteed certain value across the years of your investment. Mutual Funds on the other hand can go down like what happened in 2008 when the market went down by as much as 38%.  Moreover, Mutual Fund Investing requires a lot more financial literacy as you have to contend with so many funds (43) to choose from. You need to also have knowledge of how to get in and out and how to monitor the Fund. And on top of it all, Mutual Fund investing requires also a lot of discipline to investment as the investment amount and the time to invest is heavily dependent on the investors discipline. If you have the extra money and have acquired the discipline to save and invest, then proceed with this Mutual Fund Level 2 investing. Happy Investing! God bless!