With interest rates on ordinary savings deposits down to two percent and earnings from Treasury bills not much better, Filipinos with funds set aside for investments are looking for alternatives. Enter mutual funds.

A mutual fund basically refers to a pool of money from various investors managed by a professional fund manager. This type of investment is ideal for people who have the money for investments but do not have the expertise to invest the money on their own.

Through mutual funds, investors have access to expert fund managers or asset managers.

A fund manager is a specially trained professional who invests and administers these pooled funds.

It is his responsibility to maximize the fund’s value and the return on investment of individual investors. The fund manager, thus, must necessarily be abreast of the developments in all possible investment arenas such as the stock market, government securities, and commercial papers.

Mutual funds differ in purpose. There are funds that are invested entirely in stocks either here or abroad. These are considered high risk but do promise high returns on investments.

Fixed-income funds, on the other hand, are devoted to low risk but relatively low return investments with set income streams such as government securities, Treasury bills and commercial papers.

There are also the balanced portfolios that have both stocks and fixed-income securities in their portfolio. The asset manager can go aggressive buying more stocks or conservative (buying more fixed income securities) depending on the investment climate.

Mutual funds are popular investment instruments in more developed countries, and the Philippines is fast catching up.

Funds in the Philippines
The amount of money invested in mutual funds has almost doubled in the first three months of this year alone to P290 billion from P14.9 billion in the same period last year, according to a report on the mutual fund industry of the Investment Company Association of the Philippines, Inc.

The bulk of these funds, amounting to P26.9 billion, were invested in bond funds or fixed-income funds.

The Ayala Life Fixed Income Fund, which is managed by BPI Asset Management, is the single biggest fund with P13.2 billion in assets, followed by Philam Bond Fund with P6.6 billion and Philam Dollar Bond Fund with P4.9 billion. Coming in next is the Sun Life Prosperity Bond Fund with P2.8 billion.

Balanced funds, on the other hand, account for P1.2 billion of the total assets invested in mutual funds. The GSIS Kinabukasan Fund is the biggest of these funds with P540.1 million, followed by MFCP Kabuhayan Fund with P237.2 million and Philam Fund with P165.9 million.

Pure stock funds account for only P791.4 million, of which the Philam Strategic Growth Fund accounts for P335.4 million, followed by Philequity Fund with P171.5 million and Sun Life Property Philippine Equity with P113.3 million.

The marked preference for the bond funds indicate that most Filipinos have a low tolerance for risk. Filipinos would rather go for funds that are safe and with stable income yields.

This is seen in the more than doubling of funds invested in fixed-income mutual funds since last year from P11.6 billion in the first three months of 2002 to P26.9 billion.

Funds invested in pure stock funds, on the other hand, lost more than half of their value from P1.6 billion to only P791.4 million, due primarily to the volatility of the stock market and the plunge in stock prices both here and abroad.

BPI Asset Management noted that the Philippines was slow to develop these asset management-type funds because of the relatively low national savings rate, compared to the rest of Asia and the world.

Even common trust funds are currently accepted only by the middle to high-income classes. Most of the available funds are usually still invested in savings or time deposits, or worse kept under the pillow.

Both are due to the lack of awareness of the benefits of investing in mutual funds and the inability to meet the minimum investment requirement, which varies among mutual funds, but are usually around P100,000 and locked in for about 180 days.

Sale is also hampered by the fact that banks are not allowed to market mutual funds through the branches.

Less developed and sophisticated than its Southeast Asian neighbors, the Philippines only started to venture into mutual funds in the past decade.

There was actually a mutual fund industry in the 1960s but the industry did not prosper due to bad investments, which forced many of the mutual funds at that time to go bankrupt. With better regulation and more sophisticated fund managers, the industry saw the rebirth of the mutual fund industry over the past 10 years.

There are only about 24 mutual funds operating at present but the industry is actively drumming up interest in this new and promising sub-sector of the local financial services industry, according to BPI.

When choosing a mutual fund to invest in, an investor must look at three major factors – the track record of the fund, the quality of the asset manager, and the people behind the fund itself.

Track record refers to how well the fund performed over a period of time. The fund’s performance must be measured against a benchmark.

For fixed-income funds, the performance is usually measured against the 91-day Treasury bill rate. For the stock funds, it is against the performance of the Philippine composite index, while a balanced fund measures itself against both.

An investor must also look at the asset manager. If you are going to let somebody manage your hard-earned savings for you, you have to make sure that he knows what he is doing.

The size of the assets being managed is usually a good indicator because it means that a good number of individuals and institutions have placed their trust in the fund manager.

Finally, there are the people behind the fund. It pays to know if the people behind the fund being managed by a fund manager are known for their integrity - to ensure that the mutual fund is not being used for other purposes.

BPI senior vice president Emil de Quiros predicts a bright future for the mutual fund industry, saying that it may be just a matter of time before other specialized mutual funds would proliferate in the market.

“These funds may not be the double your money type, but they are much safer,” de Quiros says.