Mutual Fund: Course Learning Outcomes

FME 231
COURSE LEARNING OUTCOMES

At the end of this course, you should
be able to:
1. Discuss the fundamental concepts of

mutual funds.
2. Evaluate and manage risks involved in
mutual fund investing.
3. Develop critical thinking in analyzing
asset investments.
4. Design a mutual fund portfolio.
5. Create relevant researches relative to
mutual fund investing.
MUTUAL FUND
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“Wide diversification is only required when investors do
not understand what they are doing."
— Warren Buffett
COURSE INTRODUCTION
This course provides a discussion of mutual fund industry and its operations. It is intended to
acquaint students with the fundamental concepts of mutual fund management.
Furthermore, this course explores the approaches to further improve and minimize the
hidden pitfalls of mutual fund investing. Students will improve their decision making skills in
assessing portfolio of investments which makes them better finance professionals.
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_____________________________________________________________________
MODULE 1
INTRODUCTION TO MUTUAL FUNDS
OBJECTIVES:
The topic will enable the students to:
 Study the history of mutual funds in the Philippines
 Differentiate mutual funds and UITFs
 Enumerate the advantages and disadvantages of mutual funds
 Differentiate the classifications of Investment Companies
ENGAGE
ASSESSMENT: Posted in the Google Classroom in the form of a Question
(Ungraded but required to be submitted)
Give (1) Advantage and (1) Disadvantage of investing in Mutual Funds? Limit to 3
sentences each explanation only.
PART 1: INTRODUCTION
There are a lot of options you can choose from when it comes to investments and
mutual fund investing is one of them. If you already understand stocks and bonds, their risks
and potential returns, and the benefits of diversification, the you have an overview about
investing. After you understand the specific types of securities (stocks, bonds, and so on)
that funds can invest in, you’ve mastered one of the important building blocks to
understanding mutual funds.
A mutual fund is a vehicle that holds other investments: When you invest in a mutual
fund, you’re contributing to a big pile of money that a mutual fund manager uses to buy
other investments, such as stocks, bonds, and/or other assets that meet the fund’s
investment criteria.
EXPLORE
MINI QUIZ (Will not be submitted)
To assess our knowledge about mutual funds,
try this short quiz online.
https://play.howstuffworks.com/quiz/mutual-funds-quiz
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A. HISTORY OF PHILIPPINE MUTUAL FUNDS
Similar to the concept of the Filipino tradition of Bayanihan which promotes
efficiency in getting tasks done through a collective effort, a mutual fund is an investment
company that pools money from shareholders and invests in a diversified portfolio of
securities.
In the Philippine market, the concept of mutual funds is not entirely new as history
can be traced way back in the early 1950's. The birth of Philippine mutual funds was
brought about by the growing popularity of off-shore funds worldwide. In the absence of a
governing law, the companies were registered as finance companies. Some capitalized
on long-term investment programs which made their investors commit to a fixed payment
scheme (Php 50 per month for a period of 20 years). The initial amount invested for the first
year served as the commission, thus, forcing investors to make successive payments
thereafter before they would be able to break-even, much more so, realize a profit. Some
of these companies charged exorbitant sales charges of 8%. A fund even charged a front-
end load of 50%.
Simultaneous with the collapse of the stock market in the late 1950s, Ka Doroy
Valencia (very popular and influential columnist at that time) openly criticized the process
by which mutual funds were being sold and managed. Three of the four companies which
were operating at that time eventually closed shop. Only the Filipinas Mutual Fund
remained. It was later transformed into a finance company and much later, into a
development company.
As a response to the fiasco of the first mutual funds, the government enacted R.A.
2629, otherwise known as the Investment Company Act. Patterned after the U.S. Law but
legislated as a reaction to the recent debacle, the ICA contained stringent measures
which hampered the development of the industry in general.
Under the said law, Trinity Shares was the first company to register in August 1969
and began selling its shares publicly in October of the same year. In a span of 4 months,
the company opened 11 branches, doubling its sales each month and its value
appreciated to as much as 27% in the 4th quarter. Mr. Arthur B. Sokolow, the prime mover
behind the fund, was able to convince Ka Doroy not only to invest in the new fund, but
also to sit as director. Trinity's success led to the registration of other funds, such as the
Pacific and Malayan Funds owned by Alfonso Yuchengco and Ting Roxas' Bancom.
While such companies continued to thrive, the equity market remained thin. This was
further aggravated by the political instability brought about by the dawning dictatorial
regime, punctuated by the “1st quarter storm”. Eventually, this led to capital flight and a
30% dive by the Manila Stock Exchange. Given the heavy dependence of industry to the
latter, mutual funds, part or all equity, thrive or die with the stock market. The absence of
other investment outlets limited the sense of diversification of funds then. As a result, the
Securities and Exchange Commission totally banned the sale of mutual funds in 1973.
This death blow to the mutual fund industry led Trinity Shares, Malayan and Pacific
Fund to stop operations. To date, Pacific and Malayan remain dormant. Trinity Shares was
acquired by PDCP in 1979 and was eventually bought by Philamlife in 1993.
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Evidently, the failure of the mutual fund industry decades ago can be attributed to
the following factors: 1) lack of government regulation; 2) deteriorating political and
economic condition of the country; 3) the absence of alternative investment vehicles; and
3) an undeveloped equity market.
In the late 1980s, recognizing the increasing role of mutual funds as a vital ingredient
for the development of Capital Markets, the Asian Development Bank, through Jardines,
initiated a study on mutual funds. In 1989, the SEC, in its effort to revive the mutual fund
industry established a taskforce for to oversee the formulation of the Implementing Rules
and Regulations (IRR) of the ICA . The resulting IRR was promulgated on October 1989 and
took effect 90 days later.
The IRR changed the existing provisions of the said law, increasing paid-up capital
from Php 500,000 to Php 50,000,000, adding a 24-month hold out, and increasing required
audits to four per annum. All of these provisions were intended to protect the interests of
the investors and shareholders.
Under the new IRR, the Galleon Fund (again sponsored by Mr. Arthur B. Sokolow)
was the 1st company to register and started selling its shares in Feb. 1, 1991 . A few other
investment companies followed suit, and the numbers have increased ever since.
Within a few years from this new beginning, the investment climate was not as rosy
as the Asian financial crisis took its toll on the budding industry. However, the stability of the
Philippine Mutual Fund Industry has a much better chance at this time. The level of
professionalism is much higher. The necessary controls and regulations exist.
Consequently, this period puts all the players to test, and it is with utmost confidence that
Philippine Mutual Funds will be here to stay.
Investors who want to earn from stocks or bonds may find it difficult to actively trade
or monitor the daily values of these securities. To address this problem, investors who don’t
have time or expertise may instead choose to put their money in Mutual Funds or Unit
Investment Trust Funds (UITFs).
Mutual funds and UITFs are collective investment schemes wherein funds from various
investors are pooled together into one fund to achieve a specific investment objective.
The funds are then entrusted to a professional investment manager who manages a
diversified portfolio that may consist of stocks, bonds, and other investment assets.
The fund makes money from the appreciation in value of the assets owned by the fund and
the dividends and interest it receives from the securities held. These incomes are then
passed on to the investor less fees and fund expenses.
EXPLAIN
WHAT ARE MUTUAL FUNDS?
In the Philippines, mutual funds are open-ended investment companies which means
shares can be bought and redeemed at any time. Investors of mutual funds buy “shares,”
making them “shareholders” of the investment company. As part-owners, mutual fund
investors are entitled to shareholder rights such as the right to vote and the right to receive
dividends.
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WHAT ARE UITFs?
UITFs are also open-ended investments schemes but instead of buying “shares,” investors
buy “units” of investment. As such, they do not become shareholders of the bank. Their
participation is limited only to their share in the incomes or losses of the investment fund.
B. MUTUAL FUNDS vs UITFs
Mutual funds and Unit Investment Trust Funds are similar in nature but differ in a few
aspects. The two are both collective investment programs but mutual funds are offered to
the public by investment companies while UITFs are product offerings of banks.
Mutual funds and UITFs both use marked-to-market valuation, wherein the
investment portfolio is valued using the market prices of each asset owned. Using marked-
to-market valuation, the price of each unit of UITF (called Net Asset Value per Unit or
NAVPU) or the price of each share of mutual fund (called Net Asset Value per Share or
NAVPS) can be determined. The formula to compute these prices is Net Asset Value, or the
market prices of assets less liabilities, divided by total outstanding units or shares of the fund.
In terms of regulation, mutual funds are governed by Republic Act No. 2629 (RA
2629), also known as the "Investment Company Act" and are regulated by the Securities
and Exchange Commission (SEC). As for UITFs, the Bangko Sentral ng Pilipinas (BSP)
regulates them since these are bank products.
Both mutual funds and UITFs are not covered by the Philippine Deposit Insurance
Corporation (PDIC).
C. Investing in Mutual Funds & UITFs
Advantages
These two collective investment schemes provide good investment opportunities because
of the following features.
 Professional Management. Investors are not anymore burdened with issues such as
asset selection and monitoring because the funds are entrusted to and managed by a
full-time professional fund manager who makes investment decisions.
 Diversification. Combining various assets in a portfolio offers investors higher returns
because risks are spread out and the negative performance of one asset may be
compensated by the positive performance of another. Since mutual funds and UITFs
have large asset base, these funds can invest in assets that may not normally be
accessible to individual investors. This can increase the profit potential and also lower
the investors’ risk.
 Economies of Scale. Individual investors who purchase and trade several assets incur
large amount of fees. In mutual funds and UITFs, these costs are shared among all
investors, drastically reducing the individual’s costs of transaction.
 Liquidity. Shares of mutual funds and units of UITFs are highly liquid, meaning they can
easily be bought from and sold to the fund at any time.
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 Low Minimum Investment. In the Philippines, a mutual fund can be purchased for as
low as P5,000 per share while investors can invest in UITFs for as low as P10,000 per unit.
Disadvantages
Of course like any other investment asset, mutual funds and UITFs also have drawbacks
and risks.
 Investment Risk. Returns in mutual funds and UITFs are not guaranteed and the
possibility of loss may be expected. The value of the fund is dependent on the value of
the assets in the portfolio and some assets may underperform and generate losses for
the fund.
 Overdiversification. In the process of investing in a variety of assets, some funds tend to
overdiversify, wherein the fund acquires many assets that are highly related, reducing
the benefits of diversification.
 Costs and Fees. Mutual funds and UITFs charge several costs and fees that eat into the
individual investor’s profit. These include the annual management fee, which
represents the compensation of the fund manager, and other administration and
investor relations expenses. Most mutual funds also charge a fee to enter the fund
(called “entry sales load” or “entry fee”) or exit the fund (called “exit fee” or
“redemption fee”). UITFs usually do not have entry fees but may charge an early
withdrawal fee if the units are withdrawn within a certain period.
D. TYPES OF MUTUAL FUNDS AND UITFs
 There are four (4) types of mutual funds and UITFs in the Philippines.
1. Equity or Stock Funds
These funds invest primarily in the shares of publicly-listed corporations. The fund objective is
capital appreciation or long-term capital growth.
 Ideal for: High-risk investors with experience in stock market investing who want to
maximize their profits
 Where the funds are invested: Shares of stocks listed in the Philippine Stock Exchange
 Investment horizon: Long-term (Five years or longer)
 Goal: Long-term capital growth
 Risk appetite: Aggressive
2. Bond Funds
Bond funds invest primarily in fixed-income securities issued by the government or large
corporations. Examples of fixed-income securities include bonds, Treasury bills, and Treasury
notes. The objective of the fund is to provide current income that is consistent with
preservation of capital and liquidity.
 Ideal for: Low to moderate-risk investors who want to protect their savings against
inflation while earning higher profits than time deposits and money market
investments
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 Where the funds are invested: Fixed-income, long-term securities such as Philippine
treasury notes and other government bonds and corporate bonds
 Investment horizon: Medium to long-term (One to three years)
 Goal: Capital preservation
 Risk appetite: Conservative to moderate
3. Balanced Funds
Balanced funds invest in a mixture of equities and fixed-income securities. The goal is to
provide total return consisting of a high level of income that is consistent with preservation
of capital, liquidity and long-term capital appreciation.
 Ideal for: Low to moderate-risk investors who want to earn a bit higher profits than
bond funds
 Where the funds are invested: A mix of shares of stocks and bonds (typically 60%
stocks and 40% bonds)
 Investment horizon: Medium to long-term (Three to five years)
 Goal: Medium to long-term capital growth
 Risk appetite: Conservative to moderate
4. Money Market Funds

Among the four types of mutual funds in the country, money market funds provide the least
amount of risk. Its goal is to provide current income by investing in short-term securities with
portfolio duration of one year or less. These may include short-term government securities,
special deposit arrangements, and time deposits, among others.
 Ideal for: Low-risk investors who want to prevent their money from losing its value
while earning a little higher profit than regular savings or checking accounts and
time deposits
 Where the funds are invested: Risk-free, short-term securities, including time deposits,
government Treasury bills, and corporate bonds
 Investment horizon: Short-term (One year or less)
 Goal: Capital preservation
 Risk appetite: Conservative
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E. CLASSIFICATIONS OF INVESTMENT COMPANIES
Investment companies are business entities, both privately and publicly owned, that
manage, sell and market funds to the public. The main business of an investment company
is to hold and manage securities for investment purposes, but they typically offer investors a
variety of funds and investment services, which include portfolio management, record
keeping, custodial, legal, accounting and tax management services.
1. CLOSE-END FUND
A closed-end fund is a portfolio of pooled assets that raises a fixed amount of
capital through an initial public offering (IPO) and then lists shares for trade on a stock
exchange.
Like a mutual fund, a closed-end fund has a professional manager overseeing the portfolio
and actively buying and selling holding assets. Similar to an exchange-traded fund, it
trades like equity, as its price fluctuates throughout the trading day. However, the closed-
end fund is unique in that, after its IPO, the fund's parent company issues no additional
shares. Nor will the fund itself redeem—buy back—shares. Instead, like individual stock
shares, the fund can only be bought or sold on the secondary market by investors.
Other names for a closed-end fund include the "closed-end investment" and "closed-end
mutual fund.
How Closed-End Funds Differ
However, closed-end funds differ from open-ended funds in fundamental ways. A
closed-end fund raises a prescribed amount of capital only once, through an IPO, by
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issuing a fixed number of shares, purchased by investors. After all the shares sell the offering
is "closed"—hence, the name. No new investment capital flows into the fund. In contrast,
mutual funds and exchange-traded funds constantly accept new investor dollars, issuing
additional shares, and redeeming—or buying back—shares from shareholders who wish to
sell.
A closed-end funds list on stock exchanges where their shares trade just like stocks
with share price movements throughout the trading day. This listing activity contrasts with
open-end mutual funds, which price shares only once, at the end of the trading day. While
the open-end fund's share price is based on the net asset value (NAV) of the portfolio, the
stock price of a closed-end fund fluctuates according to market forces. These forces
include supply and demand, as well as the changing values of the securities in the fund's
holdings.
Table 1. Pros and Cons of Close-End Funds
Pros Cons
Diversified portfolio Subject to volatility
Professional management Less liquid than open-end funds
Transparent pricing Available only through brokers
Higher yields than open-end funds May get heavily discounted
2. OPEN-END FUND
An open-end fund is a diversified portfolio of pooled investor money that can issue
an unlimited number of shares. The fund sponsor sells shares directly to investors and
redeems them as well. These shares are priced daily, based on their current net asset value
(NAV). Some mutual funds, hedge funds, and exchange-traded funds (ETFs) are types of
open-end funds.
These are more common than their counterpart, closed-end funds, and are the
bulwark of the investment options in company-sponsored retirement plans, such as pension
funds.
How an Open-End Fund Works
An open-end fund issues shares as long as buyers want them. It is always open to
investment—hence, the name, open-end fund. Purchasing shares cause the fund to
create new—replacement—shares, whereas selling shares takes them out of circulation.
Shares are bought and sold on demand at their NAV. The daily basis of the net asset value
is on the value of the fund’s underlying securities and is calculated at the end of the
trading day. If a large number of shares are redeemed, the fund may sell some of its
investments to pay the selling investors.
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An open-end fund provides investors an easy, low-cost way to pool money and
purchase a diversified portfolio reflecting a specific investment objective. Investing
objectives include investing for growth or income, and in large-cap or small-cap
companies, among others. Further, the funds can target investments into specific industries
or countries. Investors typically do not need a lot of money to gain entry into an open-end
fund, making the fund easily accessible for all levels of investors.
Occasionally, when a fund's investment management determines that a fund's total
assets have become too large to execute its stated objective effectively, the fund will be
closed to new investors. In extreme cases, some funds will be closed to additional
investment by existing fund shareholders.
Open-end funds are so familiar—virtually synonymous with mutual funds—that many
investors may not realize they are not the only type of fund in town. This type of investment
fund is not even the original type of investment fund. Closed-end funds are older than
mutual funds by several decades, dating from 1893, according to the Closed-End Fund
Center.
Table 2. Pros and Cons of Open-End Funds
Pros Cons
Hold diversified portfolios, lessening risk Are priced just once a day
Offer professional money management Must maintain high cash reserves
Are highly liquid Charge high fees and expenses (if

actively managed)
Require low investment minimums Post lower yields (than closed-end funds)
3. UNIT INVESTMENT TRUST FUNDS (UITFs)

A unit investment trust (UIT) is an investment company that offers a fixed portfolio,
generally of stocks and bonds, as redeemable units to investors for a specific period of time.
It is designed to provide capital appreciation and/or dividend income. Unit investment
trusts, along with mutual funds and closed-end funds, are defined as investment
companies.
Understanding Unit Investment Trust (UIT)
Investment companies offer individuals the opportunity to invest in a diversified
portfolio of securities with a low initial investment requirement. UITs are sold by investment
advisors and an owner can redeem the units to the fund or trust, rather than placing a
trade in the secondary market. A UIT is either a regulated investment corporation (RIC) or a
grantor trust. A RIC is a corporation in which the investors are joint owners, and a grantor
trust grants investors proportional ownership in the UIT's underlying securities.
How Investments Are Sold
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Investors can redeem mutual fund shares or UIT units at net asset value (NAV) to the
fund or trust either directly or with the help of an investment advisor. NAV is defined as the
total value of the portfolio divided by the number of shares or units outstanding and the
NAV is calculated each business day. On the other hand, closed-end funds are not
redeemable and are sold in the secondary market at the current market price. The market
price of a closed-end fund is based on investor demand and not as a calculation of net
asset value.
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ELABORATE
ASSIGNMENT: (APPLICATION) 30 points

Write down the different Financial Institutions in the Philippines that offers investments
in 5 Mutual Funds and 5 UITFs. For each company write down the type of investment,
the initial investment and reasons why people investment in their services.
NAME OF FINANCIAL TYPE OF INVESTMENT INITIAL INVESTMENT IN REASONS WHY PEOPLE INVEST
INSTITUTION (MF/UIFTs) PESOS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
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PART 2: MUTUAL FUND REGULATION AND ISSUES
Mutual Funds may appear to be a recent investment phenomenon to hit this
country, but in reality the law that governs them has been with us since 1960. Enacted in
June 18, 1960, The Philippine Investment Company Act of 1960 otherwise known as RA 2629
borrows much of its provisions from the US ICA of 1940.
As a matter of fact both Laws from two different countries define an investment company
as “any issuer which is, or holds itself out as being engaged primarily, or proposes to
engage primarily, in the business of investing, re-investing, or trading in securities.”
IMPORTANT PROVISIONS OF THE LAW ON MUTUAL FUNDS
1. Classification of Investment Companies in the Philippines (ICA Sec 5)
Open-end company means an investment company which is offering for sale or has
outstanding any redeemable security of which it is the issuer.
Closed-end company means any investment company other than an open-end company.
2. Registration of Investment Companies (ICA Sec 7)
Investment companies must register to operate as such with the Securities and
Exchange Commission by filing a registration statement in the form prescribed by the SEC.
Section 24 of the Act likewise requires the securities to be issued by investment
companies to be registered under the Securities Act (now known as the Revised Securities
Act).
3. Investment Policy (ICA Section 12)
Unless authorized by the vote of a majority of its outstanding voting securities,
investment companies may not do any of the following:
 borrow money
 issue senior securities
 underwrite securities issued by other companies
 purchase or sell real estate or commodities
 make loans to other people
 deviate from any fundamental policy or investment policy stated in its registration
statement
4. No Investment Guarantees (ICA Sec 21)

“It shall be unlawful for investment companies to guarantee any obligation of whatever
kind or nature.”
As an investor you have to consider the risks involved in investing in mutual funds: “The risks
of investing is borne solely by the investor.”
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5. Agents and Investment Solicitors (ICA Sec 40)
Selling shares of a Mutual Fund is highly regulated by the Philippine Government. Only
agents and investment solicitors that have obtained a Certificate of Authority from the SEC
may do so “after passing mental and moral test.” As a pre-requisite to the issuance of such
certificate, the agent or investment solicitor must have taken and passed the Investment
Company Representative Certification Program (ICRCP) Exam given by the SEC.
I .ECONOMICS OF MUTUAL FUNDS
A. MUTUAL FUND FEES AND EXPENSES
Fees and charges of mutual funds in the Philippines
Mutual funds are great when you would want to invest your money and hope to
enjoy potential gain. They are a great way to save particularly for financial goals that
would take you some years to achieve.
However, you might also be interested to learn about the fees and charges. When
you are getting started into mutual funds, you might forget that you are also paying the
company for keeping your savings and optimizing your returns. These fees can actually eat
into your expected profit.
 Initial investment
When you open a mutual fund, there is an initial investment that is required. It ranges
between ₱50 and ₱5,000. This amount varies from one fund to another depending on the
financial institution you wish to invest in and it can go higher.
 Minimum additional investment
After opening, you may want to add more. The minimum additional investment is between
₱50 and ₱1,000. It is actually a strategy called peso cost averaging to continue investing
just a little each month. Some companies like ALFM, FAMI and Philequity allow you to do so
automatically where your bank account gets debited at a particular date every month.
 Front-end fee
The front-end fee, also called sales load, is taken off from your investments every time you
open or add. Some companies waive the fee. Others have a tiered policy; the higher you
invest, the lesser the fee becomes or even none at all. So let’s say you put up ₱5,000 to a
fund with a front-end fee of 2%. What actually gets invested is ₱4,900.
Initial investment: ₱5,000
Front-end/Sales load: 2%
Sales load amount: ₱5,000 x 2% = ₱100
Actual invested amount: ₱5,000 – ₱100 = ₱4,900
 Management fee
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The management fee is the portion of your investment that goes to pay for the operation
of the fund and other expenses. This fee is taken out from the fund and reflected in the
value of the fund called NAVPS. The higher the management fee, the lower is the NAVPS.
 NAVPS
NAVPS or net asset value per share. It is the worth of the fund derived by adding up all its
assets minus debts, and then the result is divided by all shares. You get earnings from the
fund when its NAVPS increases as its investments grew.
 Ownership
Since the fund is also a company, you as an investor are a shareholder. The number of
shares you get depends on the the actual invested amount. So let’s assume that the
NAVPS of a fund is ₱2 per share. Following the example above,
Actual invested amount: ₱4,900
NAVPS: ₱2 per share
Number of shares: ₱4,900 ÷ ₱2 = 2,450 shares
Effects of mutual fund fees
Fees are collected to keep the operation of the fund, pay compensation for
advisors, pay brokerage fees, and other such expenses. Of course, you would want to get
a fund with lower fees as they can actually affect the amount that gets invested and the
profit that you get when you redeem your shares.
For instance, the sales load lessens the amount that would be used to invest. In turn,
you would need to wait for the fund to grow to a level that would match the sales load to
break even. Moreover, the higher management fee there is, the lower the NAVPS
becomes and the lower returns you get.
To better illustrate this point, imagine that you have a mutual fund with 1%, 3% or 5%
front-end fee. The fund requires ₱10,000 initial investment, and then you decide to re-invest
₱1,000 consistently every month. If we assume that the it grows 10% annually, then here’s
the comparison between no fees and with the fee.
From the table, it can be observed that 2% fee charged every time that you put
money can actually impact your return many years down the road. Think of the
opportunity cost when we include the annual management fee into consideration.
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HOW FINANCIAL MARKETS WORK
A mutual fund is an investment company structured as a business corporation and
managed by a Fund Manager. In the Philippines many corporations offer mutual fund
investing. In the Philippines, a corporation is a legal entity owned by its shareholders.
Example:
 First Metro Asset Management Inc (FAMI), here are the business names of the three
most popular mutual funds they handle:
 First Metro Save and Learn Equity Fund, Inc.
 First Metro Save and Learn Fixed-Income Fund, Inc.
 First Metro Save and Learn Balanced Fund, Inc.
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This is a graphic presentation of the Corporate Structure of FAMI Save and Learn Series of
Mutual Funds in the Philippines.
ACTIVE VS. PASSIVE INVESTING

Active Investing
Active investing, as its name implies, takes a hands-on approach and requires that
someone act in the role of portfolio manager. The goal of active money management is to
beat the stock market’s average returns and take full advantage of short-term price
fluctuations. It involves a much deeper analysis and the expertise to know when to pivot
into or out of a particular stock, bond, or any asset. A portfolio manager usually oversees a
team of analysts who look at qualitative and quantitative factors, then gaze into their
crystal balls to try to determine where and when that price will change.
Active investing requires confidence that whoever is investing the portfolio will know
exactly the right time to buy or sell. Successful active investment management requires
being right more often than wrong.
Passive Investing
If you’re a passive investor, you invest for the long haul. Passive investors limit the amount of
buying and selling within their portfolios, making this a very cost-effective way to invest. The
strategy requires a buy-and-hold mentality. That means resisting the temptation to react or
anticipate the stock market’s every next move.
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SUMMARY
 Active investing requires a hands-on approach, typically by a portfolio manager or
other so-called active participant.
 Passive investing involves less buying and selling and often results in investors buying
index funds or other mutual funds.
 Both styles of investing are beneficial, but passive investing is more popular in terms of
the amount of money invested. Additionally, at least on a superficial level, passive
investments have made more money historically.
 In the current 2019 market upheaval, active investing has become more popular than
it has in several years, although passive is still a bigger market.
EVALUATE
QUIZ-MODULE 1
REFERENCES:
 Mutual Fund for Dummies by Eric Tyson, MBA Author of Personal Finance For Dummies
and Investing For Dummies
 Mutual Fund Industry Handbook by John C. Bogle
 https://www.youtube.com/watch?v=2dOSDdgk5cs
 http://www.pifa.com.ph/philmutualfund_history.html
 https://www.pseacademy.com.ph/LM/investors~details/id-
1316488470519/Mutual_Funds_and_UITFs.html
 https://grit.ph/mutual-funds/
 https://www.investopedia.com/terms/i/investmentcompany.asp
 https://www.investopedia.com/terms/c/closed-endinvestment.asp
 https://www.investopedia.com/terms/o/open-endfund.asp
 https://www.thebalance.com/picking-winning-mutual-funds-357957
 https://www.peratree.com/investment-company-act-philippines/
 https://www.researchgate.net/publication/260019452_The_Economics_of_Mutual_Fund
s
 https://grit.ph/mutual-funds/
 https://pesolab.com/compare-mutual-funds-list-of-philippines-mutual-fund-
companies/
 https://www.investopedia.com/news/active-vs-passive-investing/
 https://www.peratree.com/what-is-a-mutual-fund/
19

Mutual Fund: Course Learning Outcomes

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Mutual Fund: Course Learning Outcomes

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FME 231

COURSE LEARNING OUTCOMES

1. Discuss the fundamental concepts of

INTRODUCTION TO MUTUAL FUNDS

(Ungraded but required to be submitted)

MINI QUIZ (Will not be submitted)

To assess our knowledge about mutual funds,

try this short quiz online.

4. Money Market Funds

Table 1. Pros and Cons of Close-End Funds

Diversified portfolio Subject to volatility

Professional management Less liquid than open-end funds

Transparent pricing Available only through brokers

Higher yields than open-end funds May get heavily discounted

Offer professional money management Must maintain high cash reserves

Are highly liquid Charge high fees and expenses (if

3. UNIT INVESTMENT TRUST FUNDS (UITFs)

ASSIGNMENT: (APPLICATION) 30 points

4. No Investment Guarantees (ICA Sec 21)

ACTIVE VS. PASSIVE INVESTING

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