Money BasicsInvesting

A closer look at two Investing Instruments: Mutual Funds and ETFs

Budding investors are constantly looking for investment opportunities that manage risk while offering acceptable rates of return. After allocating monthly costs on recurring items—like groceries, utilities, credit card payments—you’ve already put your money in a savings account you probably won’t be touching, except for emergencies.

Interest earnings and time deposits will not be enough to protect your savings against erosion. You may have considered starting a small business and ruled it out. Investing directly in stocks is not your thing, but you’d like a similar financial instrument that doesn’t need constant oversight and reduces the risk.

Have you considered looking at pooled investment funds? If you have a sense of your risk appetite (are you a conservative, moderate, or aggressive investor?), and know how much money you have for investment, maybe it’s time to start looking at investment funds—or pooled investment funds, to be more specific.

Pooled investment funds are investment schemes that collect money from investors and are run by professional fund managers. These funds can be invested into a mix of different asset classes, such as cash instruments, stocks, and bonds. Unit Investment Trust Funds (UITFs) and indexed funds managed by banks serve as examples. Outside of the banking system, there are two other similar products: Mutual Funds and Exchange Traded Funds.

What are mutual funds and exchange traded funds?

A mutual fund is essentially like UITFs—pooled investment funds that are managed professionally and collect daily earnings based on their investment performance. There are four main types of mutual funds, which vary according to the composition of funds within the “investment basket” and include:

  1. Money Market Funds – Money market funds are funds that are invested in short-term, or relatively short-term financial instruments like time deposits and government treasury bills.

  2. Fixed Income Funds – also known as bond funds, fixed income funds earn a fixed rate of return on bond products issued by the government, which in the Philippines are known as ROP Bonds, or Republic of the Philippines Bonds. ROPs are dollar denominated bonds issued by the Philippine government. Other examples in peso denomination include Treasury Bills (TBills), Fixed Rate Treasury Notes (FXTNs), and Retail Treasury Bonds (RTBs). Fixed income funds are also offered privately, and may earn high yields, but the rate of participation is often also high. As a fixed-rate security, treasury bonds are a long-term investment.

  3. Equity Funds – Funds invested into a collection of stocks. Think of this as a curated selection of stock investments made for you. Equity funds can earn the investor more money, but there is also a higher risk of losing money. These products will usually follow a stock market or industry index (like the Philippine Stock Exchange index, or PSEi). An Exchange Traded Fund (ETF) behaves like stocks. Buyers can buy and sell shares of ETF stocks, just like a regular stock.

  4. Balanced Funds – A combination of investments in stocks and fixed income securities. This fund tries to increase the potential earnings garnered by fixed income investments and manages the risk that comes with pure stock investment.

Your investment in pooled funds is realized when you redeem your investment at a gain. For UITFs, purchasing units allows you to participate in the fund, while for mutual funds, through purchase of shares. If the market is in your favor, the fund appreciates in value through an increase in the price or Net Asset Value Per Unit (NAVPU).

What are the advantages of mutual fund and ETF investing?

Low participation requirements. Mutual fund products vary to cater to different types of investors. One of the big benefits in the Philippines is that you can already participate with as little as P1,000, and increase your investments by increments as small as P100. When it comes to ETFs, it will depend on the ETF’s current price and minimum board lot. In the Philippines, there’s currently only one ETF in the market, First Metro Philippine Equity Exchange Traded Fund. An ETF’s value, as indicated by the Net Asset Value Per Share (NAVPS), means its price can be volatile, making it a unique investment.

A Diversified Portfolio. By definition, a composite product with mixed financial instruments in it like a mutual fund or ETF is a financial product that minimizes risk by balancing out earnings and potential losses amongst the different investments. Diversified portfolio, diminished risk.

Passive Investment. Professional fund managers take care of the investment for you—all you have to decide is when to invest, how much, and when to liquidate. This takes out all the work of monitoring the stock market or keeping close track of all the latest securities products released in the market.

Liquidity. Short-term mutual funds or UITFs like money market funds, or indexed funds like the ETF, can be bought and sold within a short period. For ETFs, it’s during stock trading hours.

Getting started

With the Internet nowadays, it’s easy to get started on your investment journey. Metrobank makes investing in UITFs flexible, easy, and affordable through three simple steps: assess your risk profile, invest in a UITF, and stay invested.

If you’ve already invested in UITFs, feel free to enroll in Metrobank Online to monitor, redeem and make additional investments. Manage your UITF portfolio 24/7 and level up your online banking experience today.

You can also learn more about investing in Metrobank’s UITF by visiting our website, or inquire at Metrobank branches to get more information.