When Filipinos think of investment, what often comes to mind are cash, business, tangible valuables like gold, and, of course, real estate—a house and lot or a piece of land to bequeath our children after we die.
For first-time investors who don’t have enough money to buy residential or commercial properties, you may try real estate investment trusts (REIT). It’s like mutual funds where a fund manager pools together money from several investors and trade them like stocks. But what is mutual fund and stocks, really?
They’re two of the major investment instruments, or we can call them “asset classes.” We’ll tackle the different types later on.
First, here are some factors to consider before diving into your much-awaited investment journey.
Factors to consider when investing
Savings and emergency fund
Do you religiously follow your budget? Living within your means doesn’t mean punishing yourself. Think of it as delayed gratification, and your future self will definitely thank you for it.
Have you saved emergency fund that’s equal to three to six months of your monthly income? Some investment could mean topping up regularly so before you start it, make sure you have enough financial cushion in case you lose your job, someone in the family gets sick, or any major happening that needs cash.
Similar with emergency fund but for bigger disasters, insurance can help you replace your lost income due to sickness, accident, disability or death. They say insurance can’t make you rich, but it will never make you poor. Don’t let all those decades of business and hard work vanish just because of a sudden critical illness. Getting insured while you’re young also means more chances of getting your insurance application approved and lower premiums to pay.
Life insurance has different purposes—not just death benefits. Similarly, each investment has its own purpose, be it a week-long trip to Boracay, college fund for children, a new car, partial payment for a bigger house. Whether for short or long term, you can identify your present life stage by describing your needs and goals.
In my job as a financial advisor, I learned that the different life stages are: the Getting Started stage, where you build your career and gather new skills; Moving Up where you start to focus on your growing family, Preparing Ahead where you finally have time to expand your business and focus on your health; and Leaving a Legacy stage, when you start estate planning while you enjoy your retirement and time with your grandchildren. If you haven’t gotten critical illnesses, you can reap the earnings and living benefits from your insurance plans and investments, and have a comfortable retirement.
The longer the time horizon, the more you can allow yourself to invest in high-risk assets because higher risk means higher returns. If you’re too lucky to not be a breadwinner after graduating from college, it’s never too early to start investing in stocks for your Leaving a Legacy stage.
One good thing about investing in mutual funds is that you can switch funds from high-risk to low-risk, and vice versa a few times every year. When you’re about to reach your senior years and you have earned your target goal, you can easily keep it safe in a low-risk and almost non-moving asset class.
So, here are the major asset classes:
It’s the most familiar type of investment—the safest and most guaranteed. Cash, bank savings, and time deposits (or certificate of deposits), however, are usually not enough to beat inflation.
It’s a debt instrument that represents a loan to a corporation or the government. In other words, they borrow money from you and other investors. The interest rate is determined beforehand so it is considered a fixed income. It’s a safe investment for capital preservation and sometimes can beat inflation. Again, lower risk means low return.
Mutual Funds (MFs)
This is where you and other investors pool your money to be handled by a fund manager and traded in your chosen asset—depending on your appetite risk and goals. Nowadays, you may invest for as little as P1,000. Mutual funds work similarly as Unit Investment Trust Funds (UITFs) and Exchange Traded Fund (ETF). The main difference is that UITFs are offered by banks, while ETF needs a broker because you buy stocks from the stock exchange and not from a company or bank.
These invested funds trade in the following paper assets, arranged from the most volatile or most risky:
Index fund – The top 30 Philippine companies or the blue chips in the Philippine Stock Exchange;
Equity fund – stocks but not limited to the top 30. This includes REITs;
Balanced fund – a safe combination of an equity fund and bond fund;
Bond fund – trades in bonds and other debt instruments; and
Money market fund – the safest and shortest-term debts, which include treasury bills and time deposits.
Thus, you need a stock broker. In the Philippines, there’s only one ETF and that is the FMETF.
Personal Equity and Retirement Account (PERA)
Recently, the Bangko Sentral ng Pilipinas authorized BPI, BDO, and Land Bank to offer PERA to Filipino investors who and intend to save for their retirement. It comes with many tax benefits and you can withdraw your funds before reaching 55 years old.
Variable universal life (VUL)
Regulated by the Insurance Commission, VUL offers insurance and investment in one product. It counters the notion of insurance being a waste of money decades ago because now, you can make your money grow through investment funds and have both living and death benefits. Investors should be guided through that purchasing a VUL doesn’t guarantee earnings and insurance is still its main product. Some insurance companies like Sun Life Philippines offer both VULs and MFs without insurance, as well as global MFs.
How much are you willing to invest?
Based on your life stage and goals, you can gauge how long and how much you will be willing to invest. Feel free to label each investment like “new house” or “bunso’s college fund.” Manage the risk by diversifying your assets—not more than 20% of your investible money in a single investment instrument.
Check your risk profile
The level of risk you can take suggests the investment that best suits your goal. Do you want to just preserve your capital and beat inflation? Get regular steady income? Do you seek capital appreciation and you’re not afraid of the stocks’ volatility because you’re in for the long term?
Don’t invest in scrupulous investments
Lastly, make sure the investment house or financial institution you’re dealing with is recognized by the Bangko Sentral ng Pilipinas and Securities and Exchange Commission. If someone promises you easy, high income but without a real product, that’s certainly a red flag.
May Dedicatoria is a writer and financial advisor. For personal financial coaching, email her at email@example.com.