Primer on Fixed Income Funds

By Alvin T. Tabañag, RFP ®

Many Filipinos view investing as nothing more than putting money in a low-interest savings or time deposit (TD) account and leaving it there for years, even decades. No wonder then that many are unable to accumulate sufficient funds for their future needs. Fortunately, there are better and more effective ways of growing your money. One of these is investing in a fixed income fund.

What is a fixed income fund?

A fixed income fund is a type of mutual fund or unit investment trust fund (UITF) which is basically a pool of money that is invested in different types of securities. Mutual funds and UITFs offer an easy, affordable and less stressful way of investing your hard-earned money to satisfy your financial goals like funding your children’s education and your retirement or buying a house.

Fixed income funds are primarily invested in a combination of government securities, commercial papers and bonds, deposit products and other fixed income instruments. Fixed income funds come in two varieties: the money market fund and the bond fund. Money market funds are invested in short-term securities that mature in one year or less while bond funds are invested in securities with maturities exceeding one year.

Advantages of a fixed income fund

1. Professional management

   • Fixed income funds are managed by professionals who analyze and monitor investments closely to maximize the earnings of the fund. Why think for yourself on how best to grow your money when you can have a team of fund managers do the thinking for you for a relatively small investment?

2. Diversification

   • Fixed income funds are invested in a wide selection of securities which reduces the risk of possible losses. This allows even small investors to achieve the same level of diversification normally available only to rich individuals and large organizations.

3. Higher earnings potential

   • Bond funds have higher potential returns compared to savings and TD accounts. The average 1-year return of all peso bond mutual funds in the Philippines as of January 30, 2012 is 9.52% (1.63% for money market funds). A 1-year TD account on the other hand is unlikely to give you more than 3% interest.

4. Affordability

   • You can start investing in a fixed income fund with just P5,000 (although some funds require more). Additional investments can be made for as little as P1,000. Investing directly in bonds and other fixed-income instruments and in long-term TDs that offer the highest interest usually requires upwards of P100,000 which is beyond the means of most Filipinos.

5. Tax free

   • Income earned by investors of fixed income mutual funds is exempt from taxes as specified in the Comprehensive Tax Reform program.

6. Highly liquid

   • Funds do not have maturity dates and you can redeem (sell) your shares anytime. This gives you the ability to easily convert your investment into cash when you need to.

Risks of investing

Although fixed income funds are the least volatile among the different types of funds they still carry some level of risk. Fixed income funds do not give fixed returns and returns are not guaranteed, meaning, you can lose money. Historically, however, the returns of good performing fixed income funds over the past five to ten years have been positive and exceeded that of long-term TDs. Based on data from the Philippine Investment Fund Association (www.pifa.com.ph) the best performing bond mutual fund earned an average annual return of 8.46% over the past five years while the average annual return for all bond funds for the same period is 5.91%.

Another risk is that investments in fixed income funds are not insured by PDIC. But even without insurance coverage, funds are still relatively safe because these are tightly regulated by the government. To ensure the protection of the investors’ money the assets of the fund are held by a third party custodian and there are restrictions as to where the funds can be invested.

Investing in a fixed income fund

You can invest in a fixed income fund through a mutual fund company or a bank that offers trust investments (see list). Before you put your money in a fund get a copy of the prospectus and study it so you will understand the features, requirements, and procedures, as well as the terms and conditions. To invest in a fund, you buy shares or units at the prevailing price as reflected in the net asset value per share (NAVPS) or the net asset value per unit (NAVPU). You can add to your investment at anytime by buying additional shares or units. Note that most mutual funds charge a fee, called the front-end load, sales load or entry fee, when you buy into a fund. This can be anywhere from 1% to 5% of the investment amount.

The value of your investment in a fund will change from day to day. It will rise or fall according to the market value of the underlying individual securities. You can calculate the total value of your investment by multiplying the number of shares or units you hold by the prevailing NAVPS/ NAVPU.

Redemption of shares

Redemption simply means withdrawing your money from the fund. Shares can be redeemed at any anytime. You can redeem all your shares or just a certain portion. The proceeds will be computed based on the number of shares redeemed and the prevailing NAVPS/NAVPU when the redemption request was made. You are considered to have profited from your investment if the redemption price is higher than the buying price.

UITFs usually impose a holding period of 30 to 90 days (it can be as short as one week or as long as 6 months). If you withdraw within this period you will be charged an early redemption fee equivalent to 0.125% to 1% of the proceeds. Mutual funds may also impose a redemption charge, back-end load or exit fee when you redeem shares. The fee is based on how long you have held the shares being redeemed and can range from 1% to 5% of the proceeds. The longer the retention period, the lower the fee. After a certain period this fee is usually waived.

Monitoring your investments

You can check the latest NAVPS/NAVPU of your fund from the website of the mutual fund or the bank. You can also view the NAVPS and historical performance of all mutual funds at www.pifa.com.ph where side by side comparison is easier. If the performance of your fund for the past 2 or 3 years is below the industry average, move your money to another fund with better returns. Keeping your money in a fund that has been performing poorly deprives you of the opportunity to earn more. Be aware, though, that past performance is not a guarantee or indication that the fund will perform the same way in the future.

List of Banks That Offer UITFs

(Source: UITF Resource Center, www.uitf.com)

1. Allied Bank
2. Bank of Commerce
3. BDO
4. BPI
5. China Bank
6. EastWest Bank
7. Landbank
8. Metrobank
9. PBCom
10. PNB
11. RCBC
12. RCBC Savings
13. Security Bank
14. Union Bank

List of Fixed Income Mutual Funds

(Source: Philippine Investment Fund Association, www.pifa.com.ph)

Peso Bond Funds

1. ALFM Peso Bond Fund, Inc.
2. Cocolife Fixed Income Fund, Inc.
3. Ekklesia Mutual Fund Inc.
4. First Metro Save and Learn Fixed Income Fund,Inc.
5. Grepalife Bond Fund Corporation
6. Philam Bond Fund, Inc.
7. Philequity Peso Bond Fund, Inc.
8. Prudentialife Fixed Income Fund Inc.
9. Sun Life Prosperity Bond Fund, Inc.
10. Sun Life Prosperity GS Fund, Inc.

Foreign Currency Bond Funds

1. ALFM Dollar Bond Fund, Inc.
2. ALFM Euro Bond Fund, Inc.
3. ATR KimEng Total Return Bond Fund Inc.
4. Grepalife Dollar Bond Fund Corp.
5. Grepalife Fixed Income Fund Corp.
6. MAA Privilege Dollar Fixed Income Fund, Inc.
7. MAA Privilege Euro Fixed Income Fund, Inc.
8. PAMI Global Bond Fund, Inc
9. Philam Dollar Bond Fund, Inc.
10. Philequity Dollar Income Fund Inc.
11. Sun Life Prosperity Dollar Abundance Fund, Inc.

Money Market Funds

1. ALFM Money Market Fund, Inc.
2. ATR KimEng Money Market Fund, Inc.
3. First Metro Save and Learn Money Market Fund,Inc.
4. Philam Managed Income Fund, Inc.
5. Sun Life Prosperity Money Market Fund, Inc.