Money Magnets

Equity funds are funds that invest in stocks.  They aim to maximize returns through capital appreciation as well as dividend earnings.  On the average, over a long period of time (~20 years), equity investments have proven to provide higher returns compared to other instruments.  However, stock investments have a tendency to be very volatile, making it a very risky investment.  That is why it is recommended to avail of this type of investment fund only if you plan to invest in it for the long-term.

Let me show you the portfolio composition of BPI Equity Fund (UITF) as of April 30, 2009.  As you can see, most of the fund is invested in Blue Chip companies.  These are companies with huge assets, are highly rated, and are considered to be very stable.  The year-to-date (YTD) return of this fund was at 9.43%! which is 4 times better than that of the ALFM Peso Bond Fund.  At this rate, you would have successfully preserved your capital as average inflation rate was only at around 5.5% as of May 2009.  However, since we want to invest in this type of fund for the long-term, what's really important to check is the average absolute return of the fund over a period of years.  Given the data on the performance report of the fund, the average return from 2006 to present is 8.10%!  The average return is still very high even when the return for year 2008 was at -42.57% due to the global crisis.  This shows you the funds return potential over the long-term. 

Balanced funds are funds that invest in both fixed income instruments and stock investments.  By combining these types of investments, they combine the growth potential of higher-risk stocks with the less volatile returns of fixed-income instruments.  In a way, the fund balances risk with return, hence the name "Balanced Fund".  As a standard, the Trust Officers Association of the Philippines (TOAP) UITF Council requires that fixed-income investments comprise 40% to 60% of Balanced Funds.  This regulation protects the investors from overly ambitious fund managers willing to risk all the fund's money in risky stock investments. 

The YTD return of BPI Balanced Fund as of April 30, 2009 is at 5.68% which is better than the ALFM Peso Bond Fund but lower than the BPI Equity Fund.  

Index Funds

The last type of investment fund is an Index fund.  An Index fund aims to perform the same way as an existing equity or fixed-income index.  An example of an existing index is the Phisix which is the Philippine Stock Market index.  An index fund that aims to perform the same way as the Phisix therefore aims to grow with the Philippine Stock Market.  The fund rises and falls with the stock market.  An example of a mutual fund that tracks the performance of the Philipine Stock Exchange Composite Index (PSEi) is the Philippine Stock Index Fund (ALFM Family). 

The YTD return of the Philippine Stock Index Fund as of April 30, 2009 is at 12.32%  which is exactly the same as that of the PSEi.  The picture below shows the performance of the fund since December 2004.  As you can see, it exactly mimics the performance of the PSEi. 

As defined in investopedia.com, an index is "a statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it."  Aside from the PSEi, other common indexes (indices) are the S&P 500, iBoxx, and JP Morgan Asia Credit Index.

Final Notes

Investing in equity based funds can produce higher returns compared to investment funds comprised solely of money market or fixed-income instruments.  However, together with the higher return potential also comes higher exposure to risk.  This risk is lessened as the investment's time in the market is prolonged.  Therefore, when investing in equity-based funds, be prepared to invest long-term (more than 5 years). 

A common investor mistake is "timing the market".  This is when an investor tries to predict when the market would rise or fall and base his/her investing decisions on that.  Most financial experts do not recommend this.  It is actually "time in the market" that is more important.  The longer your money is invested in the market, the lesser is the risk and the higher the return will be.  This holds true especially for investment funds.