A Primer on Balanced Funds

By Edmund Lao®

Mutual or pooled funds is a collection of funds gathered from different investors which is then handled by a fund manager, who in turn invests in stocks, bonds, money market instruments, and/or other securities. The beauty of investing in mutual funds is that we can leverage on the expertise of the fund managers in maximizing the gain for us tax-free. For as low as P5,000, we can already start investing and be a part of a big pool of funds that has a buying power that is far greater than that of an individual.

There are mainly four types of mutual funds in the Philippines: stock (or equity), bond, balanced, and money market. Stock or equity fund invests in shares of stock of corporations listed in the Philippines Stock Exchange (PSE). Equity funds offer the highest possibility of growth but with a corresponding high amount of risk.

Bond fund invests primarily in fixed-income securities such as bonds or treasury notes issued by the government and commercial papers issued by reputable companies, which are normally guaranteed. This makes bond fund a low risk instrument. Investing in bond funds provide capital preservation while maintaining conservative asset growth.

Balanced fund is a combination of equity and bond funds. Basically, a balanced fund is oftentimes described as having the best of both worlds where the high potential growth of equity investments is tempered by the conservative growth of fixed-income securities. The return of a balanced fund is normally somewhere between that of an equity fund and a bond fund.

Money market fund is similar to bond fund, but the difference is that the time horizon is usually a year or less.

Why should one invest in mutual funds instead of investing in individual stocks or bonds?

Diversification and professional management are the two main reasons why one should invest in a mutual fund. For example, a typical equity mutual fund in the Philippines maintains 30 or more stocks in its portfolio in order to achieve a certain level of diversification and manage the overall risk of the portfolio. Average investors will find it difficult to replicate this diversification strategy.

Aside from this, mutual funds are managed by professional fund managers who monitor the markets closely. These fund managers have years of experience and may be in a better position to make the right investment decision for their clients.

What are the fees associated with mutual fund investing?

Mutual funds typically charge fees. The first type is the sales load or entry fee which is charged upon the entry of the investment and the rate is usually dependent on the amount of investment. The second fee is the management fee. This is usually charged on an annual basis and the reported Net Asset Value per share (NAVPS) and is already net of management fee. The management fee is used to pay the fund management company for its expenses. The third is the exit fee or back-end fee, which is typically charged when an investor decides to redeem his investment before a predetermined time. There are funds that waive the fee if the redemption is made after the holding period.

Why balanced funds?

There are people who want to build wealth over time while seeking other investment avenues. They are ready to invest and currently looking at a midterm investing horizon. They are willing to take the risk but are not ready to go all the way. For people with this profile, a balanced fund is the best option since the bond part of the balanced fund helps cushion the risks, should the stock market be fluctuating unfavorably.

Since a balanced fund is a mixture of equity and bond fund, it might be seem a good idea to invest in bond and equity funds separately. Let us take for example Sunlife’s funds. Getting data from www.pifa.com.ph gives 5-year return of 19.91% for Equity, 16.32% for Balanced and 8.64% for Bond fund. Assuming a person invested P20,000 five years ago, (20K in balanced or 10K equity and 10K bond) the resulting present value will be P49,580 for balanced fund and P36,428 for the combination of equity (P21,295) and bond (P15,133). Doing the same with that of FAMI and PAMI yielded a better result for the balanced fund over the combination.

From the following examples cited, the following can be observed:

1. Going for the balanced fund gives better performance than by trying to outperform the fund managers.
2. From the website of FAMI, the fund facts showed different portfolios for balanced fund with that of equity and bond fund combined, hence the difference in the gain.
3. With a balanced fund, fund managers can best decide whether to allocate a larger percentage to stocks or bonds depending on the market’s situation. The advantage here is that there is no need to worry much whether to invest in bonds or in stocks. The risk of losing big is lowered compared to an equity mutual fund.

Investing in mutual funds especially the balanced funds is one ideal way to make your money work hard for you. Just invest your money in the fund and watch your money grow through time. Let the expert fund managers manage your money and just focus on the things that you are passionate about.

Just by investing regularly to your mutual fund account, you are slowly building your personal wealth which could be used for whatever future purpose you might have such as retirement fund, education fund, travel fund, etc. But before investing, make sure that you have prior information, especially the risks involved such as the potential to lose money. Never invest hard-earned money in an instrument that is not understood. Lastly, consider these factors when buying your funds: cost of the funds, historical returns and track record and the fund manager’s professional background. Remember, choosing a fund must not only be based on the yield but on knowing one’s self.