Question: I wanted to ask more about pooled funds, specifically equities and balanced funds. I would also like to know if I can invest in these with small amounts on a regular basis.—Val Baguios, International Organization for Migration (IOM) staff

Answer: In my last column, I gave a general introduction of pooled funds, particularly bonds or fixed income funds. I will now discuss other general funds—equities and balance funds.

Equity funds, sometimes referred to as growth funds, are pooled funds invested primarily in equities via the stock market. The bulk of the investments made, say 90 percent, is invested in stocks that are traded by the investment manager. In the Philippines, nearly all of the equity funds are invested in blue chip stocks, or those that are considered premium, seasoned and resilient such as PLDT, Ayala, San Miguel, SM and several banks. The decision on where and when to invest and when to sell is left with the investment manager, who may opt to take a passive approach of buy and hold or an aggressive stance. He may also opt for a combination of the two.

Generally, the objective of an equity fund (also known as stock fund) is long-term growth through appreciation of capital, although dividends may also be an important source of returns. It is believed that the stock market will give the most growth in investment provided there is enough time for stocks to appreciate and that proper trading of stocks are being executed. However, equity funds may also be the most volatile among pooled fund categories, as they mirror the gyration of the stock market.  Equity funds are the most risky among the pooled funds in the Philippines.

The Philippine Stock Market Index or Phisix is the benchmark when it comes to equity funds. I notice that the performance of the equity funds (in UITF and mutual funds) has generally been better than Phisix, that the fund managers are doing a swell job. Equity investing is a good way to hedge against inflation as its potential return should be better than inflation. However, I also have to emphasize that it also offers the most risk.

Balanced funds are funds invested in both equities and fixed income/money market securities. According to Investopedia.com, a balanced fund is “a fund that combines a stock component, a bond component and, sometimes, a money market component, in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate (higher equity component) or conservative (higher fixed-income component) orientation. In other words, balanced funds are combination funds that are designed to generate moderate returns with moderate risks. The funds normally have set limits on investments in asset classes, say a 60-40 mix in favor of fixed-income instruments vs stocks. Some funds have more flexibility …

Complete text found at http://business.inquirer.net/21783/all-about-pooled-funds-part-2

Sharing my column at the Inquirer last Wednesday

http://business.inquirer.net/10159/know-your-investment-objective-first

Question: I have some extra money that I can invest. What’s the first thing I should consider before I invest?—Raymond Sison, businessman

Answer: It is admirable that you are considering investing your money. The majority of Filipinos do not invest their money and just keep their money locked in savings, which is better than those who do not even save at all.

Before you do anything with your hard-earned moohla, I would recommend that you first consider what your investment objective is. In my seminars, I always tell people that our objectives will determine nearly every action we make with regard to finance. It is paramount that you determine the reason for the investment first and foremost. What is the investment intended for? What do you wish to achieve in making such an investment? Is it for retirement, future education needs of your children, purchase of an asset, or a general fund? Knowing what your objectives are will help you choose appropriate investment instruments and asset classes.

To simplify objectives, one can categorize general purposes of investments as those that will result in capital growth, provide income or both. Certain investments will yield according to your desired purpose. For instance, people buy real-estate properties because of capital appreciation while some people buy them for income purposes. Investment objectives can also change according to one’s situation. Let me use real estate again as an example. When you were younger, you bought a piece of real-estate property because you want to have capital growth. Many years after, say during your retirement years, capital growth is now overshadowed by your need for income and the rent you can get from said property becomes your objective.

Investments in the stock market are generally done for capital appreciation and although it can also provide income through dividends, the general purpose of investing in the stock market is for growth.

Investing in fixed income securities (treasuries, bonds) are made for income purposes as it provides steady flow of interest payments. Even if fixed income is sometimes traded for capital growth, the main purpose for it is still income. An asset class or investment instrument can also provide both capital growth and income at the same time. However, and as a general principle, capital growth and income provision would be relatively diminished for instruments that provide both growth and income. Don’t you just wish you can invest in something that will give you both substantially? Don’t we all?

If you are looking at pooled funds like mutual funds, UITF or unit-linked (variable) insurance, it is very important to first know your purpose or your objective before investing in them. Just like any other investment instrument or asset class, pooled funds can give you capital growth (those invested primarily in equities), income (those invested primarily in bonds) or both (balanced funds).

It is good to first check what your intended purpose for making an investment and then look at instruments or asset classes that is a best fit. Also, investment objectives should not be your only criteria whenever you are choosing where to invest. Other factors are just as important such as time frame and risk tolerance, but let’s leave those for future discussions. To learn more about better investing and learning more on personal finance, let me invite you to my seminar “Steps to Financial Peace” on Aug. 12, 2011, at the Teatrino in Promenade, Greenhills. I will be joined by my friends, Francis Kong, Paulo Tibig and Jayson Lo. You can find out about the event through https://www.randelltiongson.com/steps-to-financial-peace/.

(The author is an advocate of life and personal finance and a director of the Registered Financial Planner Institute (Phils.) and has over 20 years’ experience in the financial services industry. To know more about becoming a registered financial planner (RFP), visit www.rfp.ph or e-mail info@rfp.ph.)

As of this writing, the Philippine Stock Exchange Index or the Phisix is now a little over 3,700. Not too long ago, the Phisix went to nearly 4,500. From its peak, the market has lost about 20% of its value already. A lot of people are anxious as to the movement in the market and many are painting doom and gloom scenarios. The big question in the minds of many is if the market will continue to go down which scares many investors or would-be investors.

On the other hand, another group of people are now contemplating if it is time to get into the Philippine Stock Market now seeing there is a possibility of growth soon. These people are what we may call ‘contrarian investors’. Wikipedia defines contrarian as “one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong”. The adage ‘buy low, sell high’ is still the predominant sentiment of many people who are thinking about the stock market.

So, is it time to get into the market?  The possibility of recovery entices one to get into the market now. If the market was as high as 4,500 not too long ago, there is a big chance that it will go back to such a number, it’s only a question of when. When you do enter the market today, be prepared to buy more stocks when the market goes down further, an investment technique that will make you average your investment cost and help you recover better once the market goes up again.

A bigger question to ask is if you should invest in the stock market at all. That answer is really dependent on 3 factors: your investment objective, your time frame and your risk tolerance. You need to discern for the answers to the 3 factors I mentioned. Why are you investing in the first place? Is it for retirement, education needs? Is it to save up for emergency funds? You must determine what the need for the investment is for before undertaking any investment. When will you need to use your investment? Do you need it in 5 years? 10 Years? Or do you need it within the year? Lastly, what is your tolerance for risks? Can you tolerate10 to 20% decline in your capital or you can’t accept any loss of your capital at all? Investing in the stock market is for those who are expecting for higher potential growth over a long period of time. Further, anyone who invests in the stock market should be able to tolerate momentary losses in his investment or what they call paper losses. The stock market is not for everyone but it is a good place to make your money grow over time. Growth in the equities is a good hedge against inflation. Safer investment will typically perform at par or even below inflation rates. In the long run, you will actually loose purchasing power of your money if it does not grow ahead of inflation. In ivestments, we call inflation the “invisible risk” – something we must always be aware of.

My view? The stock market for me is more about time and less about timing. Once you invest in the stock market, you should be prepared to stay for the long haul. While there are people who earn from actively trading their stocks, the investor who has a longer time frame will eventually come out with real growth in his investment and sleep soundly at night. I will write more about the stock market in my future blogs; about individual stocks, equity funds, etc.

Here’s my tip: know your investment objective, determine your time frame, learn your risk tolerance, commit to investing regularly and diversify.

In anything, always remember ‘prudence’ is key.

Prudence is a fountain of life to the prudent, but folly brings punishment to fools. – Proverbs 16:22, NIV