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 Do You Want To Be In a Pool?

May 26, 2013

 Do You Want To Be In a Pool?
 by: Edmund Lao
 (this appeared in the TGFI newsletter Volume 1, No. 11 Issued on May 26, 2013)

Every day, people from all walks of life go to work and travel by way of MRTs, PUVs, PNR and private vehicles. In one way or another, one may arrive at his destination faster than the other, depending on the driver and the road traffic situation. In most cases, taking the rail system will get one to to arrive at the earliest time. The only problem is that during rush hours, the coaches are all full-packed. Having traveled to Hong Kong and Singapore, it is evident that our MRT system is not as efficient compared to them. In these two countries, their transportation system is so efficient to the point that owning a private vehicle is no longer a necessity. It can be safely said that pooled transportation works well with them. This mode of travel has become their way of life. If in pooled transportation, one can cut down his travel time, then in the world of investing, one can also do the same in order to increase the velocity of his money’s growth. If there is a pool in travelling, there is also a pool in investing. It is known as pooled funds. Examples of pooled funds are “Paluwagan”, Mutual funds (MF), and Unit Investment Trust Funds (UITF, not UTIF as mistakenly called by others). MF and UITF are similar in all aspects except for :
1. They have different governing body.
2. In MF, one is a shareholder and in UITF, one is a participant in the fund, One has a voting right as a shareholder in a MF, while none in a UITF.
In simple terms, a mutual fund is actually a corporation that pools the fund from different investors, and has a fund manager who takes charge of the investing strategy. Since this is an investment instrument, there are risks that are involved as well as reward that come with it. The yield is not guaranteed and this is not insured by the PDIC. Historically. Over the long term, our mutual fund industry has performed well for the past years. It beat not only the bank interest rate but also the inflation. The benefits of investing in mutual funds are: the potential for a higher return, affordability and ease of investing, diversification and professional fund management. Comparison of Mutual Fund to a PUV Investing in mutual fund is just like taking a bus ride. Let us see why. Majority of the people do not or can not own a car. In order for them to travel, they take a public vehicle. By taking this mode, the passengers are all leveraging on the driver’s skill to take them to their individual destinations. Along the way, there are possibly risks involved such as road mishap or theft. The passengers have no control over the habit , choice and decision of the driver. As compared to driving to work, one has control over his choice of route. Investing in mutual funds is the same. All investors leverage on the skill of the fund manager rather than do their own investing since they do not have the time and skill to do so. Investing in mutual funds is a perfect example of using other people’s money and effort. The drawback is that we do not have control over the funds as we let the fund manager take control of investing. The only risk is if he makes the wrong decision. On the other hand, the reward is good if he makes sound decision. It must be noted that fund managers, not the investors, have access to companies’ confidential information before they invest our money. The risk of making a wrong decision is minimal as the fund manager’s job is to take us to our financial destination which is to grow our hard-earned money. Isn’t that similar to the bus or MRT driver whose job is to bring us to our destination? Mutual Fund as a Business Yours truly has started investing in mutual funds in 2004 to test the waters. It was in 2008 when a mighty challenge arose.. Remember the Global Financial Crisis? All the mutual funds in my portfolio, specially those in the higher risk, dwindled to half the original value. Faced with the prospect of losing a lot, I decided to let my logic overpower my emotion. I pretended that I do not have such investments. Fast forward to the present, my funds are now thrice the original value. Had I caught the right timing, the increase would have been six fold. It is worth mentioning that our very own Alfonso Gonzales stayed invested since he got his 300K winnings in the Battle of the Brains contest. His investment is now at least ten fold. What a good business! Having a business is an investment and having an investment (such as mutual fund) is a business. Let us study why.
In putting up a business, one needs capital and work force to be able to make the business earn profit. The businessman plows back his profit into the business to grow the money through compounding. In mutual fund investing, an investor needs capital and work force too. In this case, our employee is the fund manager whose job is to grow our money through compounding. In both scenarios, the businessman has to pay his employees. We as investors pay the fund manager through the fees deducted from the funds’ profits. The only difference is that the businessman has operational expense and stress (due to unions, BIR, employee retention, pilferage, etc), while we as investors just simply do and enjoy our routine and earn good return. The question is: Do you want to be in a pool?

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