Equity Funds In The Philippines: A Beginner's Guide To Investing

Investing in equity funds in the Philippines can be a great way to grow your money, but it's important to understand the risks and potential benefits before diving in. Here's an introduction to get you started:

Equity funds, including mutual funds, unit investment trust funds (UITFs), and exchange-traded funds (ETFs), are a popular investment choice in the Philippines. These funds allow investors to pool their money and have it professionally managed, often with the goal of mirroring the performance of a particular stock market index, like the Philippine Stock Exchange Index (PSEi).

When investing in equity funds, it's crucial to consider your financial goals, risk tolerance, and investment horizon. Different types of equity funds are available, such as money market funds, bond funds, and equity funds, each offering varying levels of risk and potential returns.

One advantage of equity funds is that they provide instant diversification, allowing investors to spread their risk across multiple investments. They also offer low entry capital requirements, making them accessible to beginners. Additionally, equity funds are passively managed, meaning investors don't need to actively monitor and manage their investments daily.

However, it's important to remember that all investments carry some level of risk, and equity funds are no exception. There may be fees and charges associated with equity funds, and investors should carefully consider these costs before investing.

To invest in equity funds in the Philippines, individuals can approach mutual fund companies, banks offering UITFs, or stock brokerages for ETFs. It's recommended to compare fees and charges across different providers to make an informed decision.

Remember, investing in equity funds is a long-term commitment, and it's important to do your research and understand the risks involved before making any investment decisions.

Mutual funds

Types of Mutual Funds

There are four main types of mutual funds:

• Money Market Funds: Invest in short-term debt instruments with a time period of one year or less.
• Bond Funds: Invest in "bonds", which are long-term debt instruments offered by governments or private corporations.
• Balanced Funds: Invest in a mix of shares of stock and bonds.
• Stock/Equity Funds: Invest primarily in shares of equity or stock.

How to Invest in Mutual Funds

There are two ways to invest in mutual funds: directly or indirectly. The direct method involves placing a subscription through the mutual fund company itself, while the indirect method involves opening an account with "middlemen" companies, such as fund supermarkets.

Advantages of Mutual Funds

• Professional Management: Mutual funds are managed by investment experts, and investors can benefit from their expertise and full-time service.
• Diversification: Mutual funds invest in a variety of assets, helping to minimize the risk of losing investments.
• Low Minimum Investment: Mutual funds have a low barrier to entry, with a minimum initial investment of around ₱1,000 to ₱5,000.
• High Potential Returns: Mutual funds provide higher returns than savings accounts due to diversification and professional management.

Risks and Disadvantages

• Fees and Charges: Mutual funds typically charge standard fees for initial investments, early exits, and ongoing management services, which can be higher compared to active investing.
• Less Control Over Your Portfolio: Investors pass on all control to a professional fund manager, who makes all investment decisions.
• Potential Risks: Mutual funds may not be suitable for conservative investors as they carry a certain level of risk, and returns are not guaranteed.

Unit Investment Trust Funds (UITFs)

UITFs are a curated investment fund managed by experts to ensure high yield and quality returns. They are perfect for investors who don't have the time or knowledge for actual stock trading. UITFs let experts manage your investments through securities, bonds, equities, and other best-in-class instruments.

The minimum investment amount for UITFs varies depending on the bank, but it can be as low as PHP5,000 or PHP10,000.

When choosing a UITF, investors should identify their needs, goals, investment capacity, investment horizon, risk profile, and investment objective. There are different types of UITFs available, such as moderately conservative, moderate to aggressive, and aggressive, catering to different risk appetites.

The value of UITFs is determined using the mark-to-market (MTM) method, which means that the underlying investments of the fund are valued at the current price at which they can be bought or sold. The Net Asset Value (NAV) of the fund is the sum total of all the fund's underlying assets less fees and liabilities. The Net Asset Value per Unit (NAVPU) represents the price per unit of participation and is computed by dividing the NAV by the total number of units of participation in the fund.

The risks associated with investing in UITFs include interest rate risk, market/price risk, liquidity risk, credit risk/default risk, counterparty risk, and reinvestment risk.

Some examples of UITFs offered by banks in the Philippines include:

• SB Philippine Equity Index Fund
• SB Peso Money Market Fund
• SB US Technology Equity Index Feeder Fund
• SB Peso Asset Variety Fund
• PNB Prime Peso Money Market Fund
• PNB Prestige Peso Money Market Fund
• PNB High Dividend Fund
• PNB Global Growth Equity Feeder Fund

Exchange-Traded Funds (ETFs)

ETFs are simple to understand and provide investors with the opportunity to create a diversified portfolio of stocks with lower investment costs. They are also simpler to administer and have lower expense requirements compared to mutual funds or unit investment trust funds.

In the Philippines, the First Metro Philippine Equity Exchange-Traded Fund (FMETF) was the first ETF introduced in 2013 by First Metro Investment Corporation (FMIC). It is still the only ETF available in the market, tracking the performance of the PSE Index (PSEi). The fund is managed by First Metro Asset Management, with First Metro Securities Brokerage Corporation (FMSBC) and IGC Securities as authorised participants.

To invest in FMETF, you can open an account with First Metro Sec or any other PSE-accredited online stock trading platform, such as BPI Trade, COL Financial, or BDO Securities. The minimum investment amount is the price of one board lot or ten shares, and there is no minimum holding period.

ETFs are considered a safe investment due to the broad diversification of bonds and stocks at a lower cost. However, investors should be aware of risks such as market risks, trading risks, methodology risks, and tax risks.

Personal Equity and Retirement Accounts (PERAs)

PERAs are available to any Filipino with a Philippine Tax Identification Number (TIN) who is 18 years old or above. The account holder, or contributor, must be employed, self-employed, or have another verifiable source of income.

To open a PERA, you must first get an administrator, such as a securities broker, bank, mutual fund company, insurance company, or another financial institution accredited by the Bureau of Internal Revenue (BIR). You can then choose a custodian, who will receive the funds you contribute. The custodian could be an investment manager or a trust entity accredited by the BSP.

PERA assets may be invested in one or more of the following:

• Shares of stock and other securities listed and traded in the local exchange
• Unit investment trust fund (UITF) (balanced funds, equity funds, etc.)
• Mutual fund (equity funds, balanced funds, etc.)
• Insurance pension products
• Pre-need pension plan
• Exchange-traded bonds
• Annuity contracts
• Government securities

Each administrator offers different PERA investment products, but they mainly revolve around the above offerings.

You can open a maximum of five PERAs with one administrator at any given time. This allows you to explore and experience different investment products to grow your retirement funds.

Distributions from your PERA can begin when you reach the age of 55 or when you have contributed to your PERA for at least five years. Withdrawing your contributions prior to this period will incur a penalty to the government, which will be no less than the tax incentives enjoyed. However, early withdrawals without penalty are allowed in the case of hospitalisation for more than 30 days or permanent total disability.

Index funds

Step 1: Evaluate your risk profile

Step 2: Choose your index fund

Since an index fund copies or tracks the performance of an index, you must choose your preferred index fund to mirror your target stock market index. If you are investing in stocks in the Philippines, you would want to track the investment result of the Philippine Stock Exchange Index (PSEI).

Step 3: Buy shares of your index fund

If you have an online trading account in the Philippines or a stock brokerage account, like COL Financial, BDO Securities, FirstMetroSec, and BPITrade, you can start buying shares of your chosen index funds. Otherwise, you can invest in an index fund through your bank’s UITF index funds or feeder funds. Another way to start an index fund investment in the Philippines is through a mutual fund company like Sun Life, Philequity, and ALFM Mutual Funds.

Step 4: Set your target period or target profit

Most index funds are long-term investments because they are primarily allocated equities traded on the Philippine Stock Exchange. So, your target period must be suitable for one year or more to maximize the growth potential of your fund. Alternately, you may set a target profit instead of a target period if you prefer to lock in your earnings whenever you want. Consider the expense ratio or redemption fee when you do this.

Step 5: Hold your shares of the index fund

Hold your shares of the index fund until your target period or target profit. Historically, equities in the Philippines tend to grow over time, so you have to be patient.

Step 6: Sell or redeem your shares of the index fund

There comes a time when you have to let go of your shares of index funds to realize your profit. Sell your shares or redeem your units of index funds.

Some of the best-performing index funds in the Philippines in 2024 include:

• Sun Life Prosperity Philippine Index Fund
• Vanguard S&P 500 ETF (VOO)
• AIA Peso Equity Fund
• ATRAM Philippine Equity Smart Index Fund
• PRUInvest PH Dynamic Equity Fund (Class I)
• SB High Dividend Peso Equity Fund

Frequently asked questions