My Mutual Funds 101
Mutual Funds 101 in the Philippines
Here I’ve compiled some general information that I hope can be useful to people who want to start putting in money in mutual funds as well as some common terminologies that you would encounter and how to deal with them. Happy Reading!
The Net Asset Value per Share or NAVPS is the price of purchasing a share in the mutual. Think of the NAVPS as the book value of a mutual fund. In other words, if a fund liquidated all of its assets, paid its liabilities and distributed the remaining to all shareholders, you would receive an amount equivalent or near to the NAVPS. All funds calculate NAVPS daily based on the closing market prices of their underlying securities (stocks, bonds, deposits, etc.)
The offering price is the price at which mutual fund shares are sold to the public. It is equivalent to the NAVPS + applicable front-end sales charge. Sales charge can either come in the form of front-end loads or back-end loads (back-end means you are charged a % of your proceeds when you sell your share). Funds without sales charges are called no load funds. Always ask if the fund charges any sales load whether front-end or back-end (most funds have options for both and will allow you to choose). Back-end loads that are kept for more than 5 years are usually waived. Sometimes funds also require you to stay invested for a certain amount of time and failure to do so would incur early redemption charges. Ask the mutual fund how this would affect your purchase price. If possible ask for sample computations.
Like any other company, a mutual fund incurs annual expenses (management fees, distribution fees, administrative fees, other expenses). Collectively these expenses are also known as the expense ratio and are usually represented as a percentage of the fund’s total assets. They typically range from 1% to 3%. This is a very important number as whether or not the fund earns, you continue to pay the expenses. The daily NAVPS computation already takes into account the fund’s operating expenses. In my view 2% is the maximum expense ratio tolerable unless the fund is able to produce returns that are significantly higher than other funds.
There are typically several types of funds depending on any combination of their underlying investment but they generally fall in the following categories:
- Equity Funds – primarily invested stocks. Suitable for those with an aggressive risk profile and long term outlook. In my view long-term would at the very least be 10 years.
- Bond Funds – primarily invested in bonds. Suitable for those with a moderate risk profile and medium term outlook.
- Balanced fund – primarily invested in a stocks and bonds. Suitable for those with a moderate to slightly aggressive risk profile and medium to long term outlook.
- Money market fund – primarily invested in government securities or short term deposits with maturities of less than a year. Suitable for those with a risk adverse profile with short term outlooks.
- Index Fund – primarily invested in stocks with the same weights as with the and attempts to track the index such as PSEI
There could be several other types of funds such as international funds, dollar funds, high dividend funds, etc., all of which differ based on their underlying investments. You should check the mutual fund fact sheet or prospectus to find out more about each fund.
Most funds compare themselves to a benchmark and you should invest in funds that do better than their own benchmark. More importantly you should also look for funds that already have a proven track record of at least 5 years. The longer the track record the better as this gives you a better picture of how well a fund truly is performing especially if it has already gone through a market crash.
You should look at the annualized performance of a fund not only at its 5 year or 10 years annualized performance but the performance since its inception as this would provide you the most accurate basis of return. Ask the fund how they computed for their annualized performance whether this is the same as the compound annual growth rate (CAGR) computation or just simply total return divided by # of years. Always ask for the CAGR performance because the CAGR shows the true compounded growth rate or the geometric mean. A CAGR of 10% means that your money in the fund gets compounded at 10% annually.
Ex. You invested PHP 1,000 in ABC Fund and received 10 shares with a NAVPS or purchase price of 100 (assuming no sales load).
After the first year the NAVPS grew by 100% so it is now at 200
Year 1 return: PHP 2,000 (200 NAVPS X 10 shares)
The following year the stock market crashes and the fund’s NAVPS is reduced 50% so it is now back to 100 (.50*200).
Year 2 return: PHP 1,000 (100 NAVPS x 10 shares)
If you calculated your average return, it would have been 25% (100% for the first year, -50% for the second year)/2 years. Using the 25% average annual return, you would expect that over the 2 years your investment would have amounted PHP 1,562. Clearly this is not the case and in fact, you only ended up with your original investment. The CAGR computation in contrast would show 0% compounded growth which is the true return.
You can earn from mutual funds when they give out dividends, capital gains distribution or when you redeem your shares (i.e. sell your shares back to the mutual fund which is obliged to buy them back from you). Note that you are not taxed when you redeem your shares. You are however taxed 10% on cash dividends received. Because of this, some funds don’t declare cash dividends and retain the earnings to increase the NAVPS but be sure to ask your mutual fund first on their policy regarding dividend distribution as well as capital gains distribution.
The type of fund you invest in would depend on your risk profile and investment horizon. If you want to maximize returns then look to invest towards equity funds. Remember that these are long term funds and as such should remain invested for at least, in my opinion, 10 years. The prices may fluctuate sharply in any given year and you should have the stomach to see your investment lose 80% or more of its value (assuming a very big crash). However should your financial adviser or fund manager advice you that it is time to unload your shares in the fund then you would do well to listen to their advice as well. If you see trouble ahead, there is no shame in asking them what they think of the situation and whether you should be looking at lightening your shares in the fund.
In general look for funds that have:
- proven track records of at the very least 5 years. the longer the better
- low expense ratio
- low front-end loads or waived back-end loads if you hold for at least 5 years
- outperform their indicated benchmark
- outperforms or is in-line with other funds that have the same investment objectives (i.e. compare equity funds with other equity funds)
- CAGR that is at the very least higher than the rate of inflation
- Shareholder friendly meaning they are prompt to your requests, easy to talk to, transparent and willingly give out any information you ask in relation to the fund
Buying mutual funds through banks may have other fees associated with them such as trust fees so ask how this would affect your investment and ask for sample computations if necessary.
One popular strategy is to cost-average your way into funds (i.e. put lump sum amounts of money each month as opposed to one huge lump sum). This is to ensure that you don’t put all your money in when the prices are too high and also allow you to put money in when prices go low.
As with everything else, mutual funds do not guarantee you anything. If something happens and economies around the world fall, chances are you will lose a significant amount of your holdings. Diversify your investments as much as possible (you could possibly do this by purchasing shares in an equity fund and a bond fund so that if stocks crashes, bonds might still do ok) and always keep emergency money of at least 6 months to a year worth of monthly expenses.
Ask for the mutual fund prospectus (you should by law be given one) as this would detail some policies and information regarding the fund.
Unit Investment Trust Funds are another alternative that banks offer. In essence, they are the same as mutual funds so just the same be sure to read about the fund’s performance and objectives.
Be sure to seek financial advice from professional financial advisers to maximize market opportunities and to address your financial circumstances.
You can also check out this video from investopedia: http://www.investopedia.com/video/play/introduction-mutual-funds/
My experience selling a phone at Greenhills
I recently sold my sister’s old Samsung phone in Greenhills to help her pay-off for the new phone she bought. Vira Mall is probably most known for it’s “tiangge” where people can buy almost anything at cheaper prices, although most of them are copied originals. Buying and selling of gadgets is also popular and occupies a large section. You won’t spot any of that when you enter from the mall entrance but once you go deeper, lo and behold! The tiangge area is also accessible from Theater mall or Shoppesville. It’s like they’re all connected inside like tunnels leading to the main chamber. Disclaimer #1: You can as easily lost as well!
photo courtesy of Greenhills Shopping Center
Photo courtesy of tripadviser.com
For my due diligence, I did some research on sulit.com and came up with a pretty good estimate on how much people were buying the Samsung phone for. I used this as my mental price target. When I arrived at the Greenhills tiangge area I looked around before spotting a shop that looked like it would give me a decent price. Unsurprisingly, the shop offered me a price that was 20-30% lower than my mental price target. Indeed they had to re-sell the phone so I couldn’t expect them to give me the current market price for it.
My sister recently replaced her 1-year old Samsung Galaxy Ace 2 for the more modern Starmobile Diamond V3.
My sister’s phone,however, was very well maintained and complete with the original box and all the accessories so I figured that it should fetch a premium. After a bit of haggling, I just couldn’t let it go at the best price they could offer so I courteously told them that I would look around. They tried to force me to sell it to them, saying that once the shops knew I was going around they wouldn’t entertain me anymore. It immediately reminded me of a big mafia where the shops were all rigged to benefit them but I wanted to believe that the shops still competed against each other as how they should to give me the best price. Disclaimer #2: Depending on the shop, more than one person might talk to you and based on my experience they could exert some peer pressure on those with lesser nerves. Remember it is your right to sell or not to sell.
Fortunately, I knew the place was big enough so I just had to avoid going to shops that where within visual range of each other so they wouldn’t know that I had been going around. After visiting a few shops though, it was clear that they all had a fixed price for the phone. To no avail, they must have had some kind of internal price agreement with the gadgets they buy and sell. As I was down on my luck and finally just wanted to get rid of the phone to the next shop I visited, another shopper who saw me showing off the phone called my attention.
To my surprise, he was interested in buying the phone! I gave the best sales talk I could and offered to sell it to him at a price that was still at a substantial discount to my mental price(which was based on actual market prices) but still higher than what the shops offered. In the end, I had to concede a few but I was able to close the deal! It was a win-win situation. My time wasn’t wasted and it was surely a great experience for me. I would think that some might have found the whole experience traumatic but learning to deal with all kinds of people at any situation is priceless. As with all, preparation, patience, some luck and opportunity, all came into play.
For those wondering, I could have sold the phone at sulit.com and possibly earned a few hundred more but we wanted to raise the cash fast and I didn’t want to spend the time having to respond the inquiries and meet-ups. In the end, the trade-off for hassle and time wasn’t worth it to me. I knew the shops at GH were ready buyers but luckily I was able to sell to an end customer that gave me a better price.
The Real Rate of Return
The real rate of return
My mother recently subscribed to the 7-year bond offering of Globe with coupon payments of 5%. Given the current inflation rate of 2.6% (May 2013), she would only be actually receiving a real return of 2.4% (gross of taxes and other fees).
Why is Inflation Important?
The Inflation rate also known as the purchasing power of money directly affects the value of the money we currently hold. Remember money is not real. It is arguably just a very nice piece of paper that we have given value based on economic conditions and supply and demand. It is not, for example, like holding silver or gold which in itself has value being precious metals. If the world were, to put it simply, suffer a disaster so catastrophic that it wipes out most economies and any other form of a working government then money itself would become useless.
A P1.00, 20 years ago, does not have the same value as P1.00 right now. A P1.00, 20 years ago, would have been able to purchase a lot more as compared to today’s prices. (You can check this for yourself) Knowing the effects of inflation is important because inflation essentially erodes the value of your money and your purchasing power!
Why do you need to know the real rate of return?
Do not be fooled into thinking that money parked in a savings account with a rate of 1.5% per annum (current rates are actually much lower than this) is actually increasing your wealth when inflation rate is at 2.6%. You are actually losing 1.1% of your wealth!
The aim of your investment should be to grow at a rate that is faster than that of the current inflation rate. Always calculate your returns in based on the real rate which takes into account inflation.
Monthly inflation rates are released by the government and a hike or a reduction is usually a result of economic conditions both in domestic or foreign markets. It is important to always keep yourself up to date and continually review and manage your portfolio of investments to make sure that you grow faster or at least on par with current inflation.
Cubao Park n’ Ride – P50 Fixed Fee Parking in Cubao
The Smart Araneta Center Coliseum recently finished constructing a multi-level parking catering to those who want to park their cars then ride the MRT or bus to work. It is a closed parking facility with rotating security guards. The fixed parking rate is P50 from 6am to 11pm. Corresponding overnight fees will be charged for cars left after 11pm. It’s a 5-10 minute walk from the parking lot towards the cubao MRT station or the cubao LRT station and vice versa – the parking building is actually somewhat in the middle of farmer’s mall and gateway. It is beside the coliseum itself so just ask any guard in the area to point you to the right direction (I couldn’t find a decent map to show the location). The set-up similar to the one offered in Trinoma. At 6:45am the parking is still quite spacious so you don’t have to worry about losing space. Although if you’re riding the MRT then you’ll have to be at the station by at least 6:30am to avoid the massive pile-up for the train. Alternatively you can ride the bus as well.
I’ve just started working in Makati and I know how ridiculously high the parking fees are not to mention the gas and the traffic I have to deal with each and every day. If I brought a car and parked in Makati, I would be spending nearly P60,720 a year just for my travel to work!! It is an insanely high expense for someone with mediocre income. If instead I parked in Cubao and commuted to Makati via the mrt or bus, I would still be spending around P31,545 a year but that’s nearly 50% more in savings – still a high expense but one I’d rather live with.
That’s P32k more per year that I could use to buy more clothes, buy new gadgets, spend on food trips, travel to other countries or more importantly save and compound over the rest of my life. P32k growing at a conservative 1.5% CAGR (which is a bad investment considering an average inflation of 3%) would give me P42k in 20 years or a return on my original investment of 32%. The number seem small but consider saving P32k a year and adding that to the investment each year or imagine saving P32M and having P42M by 20 years because of your savings (scale makes a lot of difference and we still haven’t considered inflation).
Still there are some other important things that I considered than just the blatant cost savings and those are safety, security, convenience, time and comfort. I needed to give some in order to take some. Riding the MRT can be very inconvenient, uncomfortable, stressful and tiring. A tiring day at work can turn into exhaustion when you are constantly pushing and securing space for yourself. You may lose time (which is our most important asset), security and comfort. By parking at Cubao, I am already considering that there would be some days requiring me to work overtime to an average of 8pm. By this time I could still ride the train and still safely get back to my home from Cubao rather than having to ride the jeep to my home late at night – which is a riskier prospect by all accounts.
If you are constantly finding yourself more negatively affected then bringing a car to Makati instead would be the better option especially if it starts to adversely affect your health. Balance is key. You do want to save more money for the future but you don’t want it at the expense of your health, security, work-life balance and family. That being said if I were earning significantly more then I would definitely consider bringing the car.
What type of person are you?
There’s probably a great number of ways you can answer this. You can define it by the professional career you aspire to be in. i.e. a doctor, lawyer, accountant, consultant, engineer and so on. You can simply say you want to be a good person or a not so good person, an adventurer, enthusiast even a thrill seeker. You can even, in fact, say you want to be a combination of many things and rightfully why not. You could say you are both an engineer and a chef or a banker and a fitness enthusiast.
I myself wanted to be many things. I wanted to be an adventurer and travel the world exploring the different cultures and wonders of the world. I also wanted to be an engineer who can look hard into the processes or errors and be able to find the solutions to fix them. Yet I also wanted to be rich and be a philanthropist helping the poor and uneducated. My childhood dream was actually to be a pilot inspired from the “Top Gun” movie of Tom Cruise. I still continue to ponder what life would (could – you never know) be like in that situation. There are possibly a number of people out there who actually become all of these – somewhere a rich retired pilot enjoying his drink.
It has often become an overwhelming feeling whenever I ask myself what type of person I want to be when I grow up. I want to be so much in so many ways that it feels like I’m so far off and I would never ever reach the top.
Yet out of the so many things that I want to be and I want to achieve, there has always been one constant that comes back to me. I actually want to be a builder. A builder in a sense that I’ve always enjoyed growing things. I want to be able to build whether it is business, relationships, career. In the process I want to be able to share the benefits from the things I build to the people around me. I’ve always imagined myself walking into a great building and saying “I built this building” and leaving a lasting legacy.
Maybe this is the point in life where people would say to follow your passion and everything else will follow. To focus on and excel at what you love to do. I know that truly finding out what type of person I am and want to be will actually help me reach my goals. I can’t have everything and I will never truly know what life throws at me but I believe knowing myself better will better prepare me for the path ahead.
Change in blog theme
I’ve decided to change the theme of the blog to better suit the direction I want it to go. I’m thinking the simple black and white colors will give it a more professional look. Although, I may decided to change it again, all else this will do for now.
I hope to be able to start writing more as I start to pick up on topics that drive my interest. This also in part with the current direction in my professional career as well as wanting to educate myself more. Even then I’ll continue to write about other things that pique my curiosity.
The learning never stops. There’s always something new to discover. It’s a very exciting road ahead.
2013 Philippine Elections
The 2013 Philippine Elections is coming up and for those of you looking to do some last minute research on the running candidates, you can check the link below from Rappler.com:
They’ve provided some very good research on all candidates running for the election.
The power of democracy is the power to vote. Every single one of us, no matter the gender or social class, will only have one vote. Let us exercise this power to shape the future of our country.
May we have a relatively peaceful and fair elections!
Happy Hats Day
The day Prince William and Kate Middleton exchanged vows was the day that I met the girl of my dreams. She wasn’t wearing a beautiful hat that day and she was actually in another country from where I was but it just so happened that we were watching the same wedding and talked about the people wearing beautiful hats through – lo and behold – yahoo messenger. (I don’t think anyone uses YM as much anymore if at all. Even I rarely use it nowadays)
She was every bit the type of girl who guys would kill for and I was lucky enough to have had the chance to get to know her better. We talked for a number of days while she was abroad and what started out as friendly conversations slowly developed itself into deeper emotions. I suddenly couldn’t stop thinking about her. I was getting crazy. I was falling in love.
Today, 2 years ago, was the wedding of Prince William and Kate Middleton
They and their royal guests wore such beautiful (others weird) hats that day.
I decided there and then I had nothing to lose. I was gunning for it. I was ready to crash and burn. I would never have lived down not trying.
As I constantly reminded myself – No Guts, No Glory.
Fast forward to today, as we celebrate the anniversary that started our journey, I look back to the past and all the crazy emotions that I had within me. Time and time again, it was the best decision I have ever made. She has made my life so beautiful and made me into a better person.
All those crazy emotions? They’re still there. I get crazy sad and lonely when we fight and don’t talk. I get in the highest of highs even by your sweet words. I fall in love each and every day. You’re the girl of my wildest dreams and imaginations. I’m the luckiest guy in the world.
I love you more and more each day. Happy Happy Hats Day.
Getting into the Stock Market
April 19, 2013, the day I opened my first online stock brokerage account
Today marks a milestone as I start on my path towards financial freedom.
Rule No. 1 of the Rich – The poor and middle class work for money, The rich have money work for them – Rich Dad, Poor Dad Robert Kiyosaki
Playing the stock market is no shortcut to getting rich but I believe with enough focus and research I can properly manage the risks that accompany it. It is but a small, albeit critical, part in a plan to continue building up my asset column and have my money work for me.
I need to familiarize myself with taking risks, getting uncomfortable and knowing how to build with what I have.
It will take dedication, guts, mistakes, learned knowledge and experience to get to where I wanna be. If I never make the first step, the first mistake then I will always end up going nowhere.
Personal Reflections
“New” – another word that I often use but hardly able to actually achieve with the exception of material things much like “change”.
I wasted my life. I wish I could have done so much more. I wish I could have stepped out and lived how I thought I could.
I wanted to learn something “new”. I wanted to learn to play the piano. I wasn’t able to. Is there anytime left?
I wanted to find a “new” job. I’m tired of my current one. I got too comfortable. I’m losing time.
This will serve as a constant reminder to who I want to be and what I want to achieve. The ability to be “new” and “change” will always be a choice I ultimately make. I have all the time in the world to make that step.
Personal and Private Investing Blog 