As our economic conditions improve and per capita income rises, more and more Filipinos are capable to invest. Problem is, it was not taught in school nor widely practiced in the family or at work. The dilemma of a potential investor these days is how to tread the investment landscape given the wide variety of available instruments. And without so much experience nor guidance, how should one start investing? What are the proper steps in selecting these types of investments? Thinking of these questions will help lessen mistakes and shorten one’s learning curve.
As a beginner, the best way to participate in the financial markets is thru the pooled funds sector. It is likewise less cumbersome. Pooled funds in the Philippines are known as Mutual Funds (MF) and Unit Investment Trust Funds (UITF). These are gaining popularity apart from the other traditional investment assets. These funds have four (4) major categories – the money market fund, bond fund, balance fund and stock fund. The local market has about 200 investment funds made available to potential investors. These are accessed in a wide variety of channels. While the typical process is to shop around these funds and evaluate it, there is a better way to know which fund is the best for you.
The first step is to look into your investment objective. Why are you investing in the first place? While this question seems to have an obvious answer- to simply make money. This is not exactly THE objective. An investment objective is guided by a purpose, an amount to achieve and a time frame associated with it. Knowing the reason why one is investing is equally important in choosing which investments to get into. Making money is secondary to this. One should have an investment goal, like a purchase of a car or house, funding education, retirement, for emergency and health, etc. As these are identified, the identification of the amount to be targeted will follow, the time horizon associated with it and yes, the ROI that should be targeted. Remember, a goal should be SMART – specific, measureable, attainable, realistic and time bound.
The second step is to determine one’s risk appetite or tolerance. This is accomplished by answering a suitability questionnaire usually available in most of the provider’s website. The objective of the exercise is to know whether one is conservative, moderate or aggressive. One’s risk appetite is as important as choosing which investment funds is appropriate. Typically, a conservative investor is suited to a money market fund or a bond fund. A moderate risk investor will favor a balance fund. While aggressive or assertive investors will gravitate towards an equity fund. This seems to be easy one, but other considerations could complicate the mix of funds.
The third step is to short list the funds of choice and start studying them thru their prospectuses and offer sheets. Sometimes these bits of information are not complete in representation. One major consideration of this is the cost associated with investing on it. Typically, most funds carry charges or fees. These charges are both seen and unseen but definitely are written in offer sheet, but sometimes in fine print. An investor has to know all of these before deciding to invest. One fund may be doing well in terms of performance, but if it carries a higher cost of investing, it is not exactly good. Likewise, funds have varying “holding periods” before one can withdraw the investment and without being charged with fees. This feature of the fund will be important in the consideration by the investor in relation to one’s objectives and preferences. While fund investing is preferably long term, the ‘availability’ and cost of withdrawing the fund is important in considering potential emergencies.
The fourth step is evaluating the fund for its performance. Most investors do this as their first step in choosing the funds. Not so fast. A different view has to be considered at this juncture. Performances of the funds are marketed and drummed up to investors only to caution them that “Past performance is not a guarantee of future results”. Such a paradox. As such, investors should not be deceived by performance alone. Remember, the first tenet of investing – the risk and reward principle. The better performing fund is not exactly the best fund to invest in. This could mean that the fund is taking more risk than the others and that is the main reason for a better performance. In the late 1990s, one bond fund was doing well than the rests of the bond funds. And when the credit crisis reached its height, some companies defaulted on their bonds which happens to be held by this best performing fund. As a result the fund had to cease operations. Other funds who may not have spectacular performances were found out to have invested mostly in government securities. Clearly, the return is a function of risk. The lesson here is to consider how fund managers have performed during tough times than in good times. This way, one will be more cognizant of the risk more the return that will be provided. Typically, most investors who are looking at better performance are conservative investors. This is what is called a mismatch.
While investing seems to be personal, it has economic reasons one should be aware of. Investing is continuous because every year, prices of goods and services go up. Inflation erodes the value of money – yearly. Hence, the need to invest and make money grow. This makes investment sort of a necessity more than a luxury or a fad. And since no one is exempted from inflation, everyone who is earning and has an economic value to the society should invest. Those who do, build their wealth in the process. And as they enrich themselves, they are helping strengthen our nation. A strong nation is made up of wealthy people and NOT just the few. This is the reason investing is considered a patriotic act next to paying taxes and defending our sovereignty and liberty.