Investing is perhaps the most significant step in the journey toward a financially healthy life. While Filipinos everywhere are now beginning to understand the values of saving their money, still very few know the key essentials to growing their wealth.
Mutual funds, unit investment trust funds, bonds, stocks. Perhaps the reason why people are less inclined to invest are because of the outright confusion that these terms provoke. Financial literacy then is the most powerful tool in the budding investor’s arsenal, a tool that can guide him to financial peace.
So what are the differences between these investment instruments? How does one know which vehicle is best for his particular lifestyle?
Stocks, also known as shares or equities, signify ownership in a corporation and represent a claim on part of the corporation’s assets and earnings. When a company goes public, meaning when it becomes listed in the Philippine Stock Exchange, it offers up part of the ownership of the company to the public. The more valuable the company is, the more valuable its stocks are. This means that stocks are inherently volatile, as the profitability and worth of every company on the stock market is subject to many variables, from the company’s leadership to the Philippine economy. Investing in the stock market is best suited to individuals who actively monitor the market and those who have a high tolerance for the risks involved.
Bonds, meanwhile, are debt investments. Investors in bonds basically loan money to a corporation or a government for a defined period of time. At the end of this period, when the bond reaches maturity, the investor then receives his money back with added interest. Owners of bonds are called creditors, or debtholders, of the issuer. Typically, bonds are a way for companies and government entities to raise money to finance major projects. If an investor holds individual bonds until maturity, bonds can provide a relatively safe and low-risk investment vehicle.
Mutual funds are a pooled investment, that is, investors join together to form a massive fund which will be handled by a fund manager. The fund manager will handle the nitty-gritty of making sure the fund grows in value, through diversified portfolios of stocks, bonds, securities, money markets, and other funds. Investors who do not have the time, the patience, nor the expertise, for the research, monitoring, and actual stock trading will find mutual funds to be a suitable instrument for their needs. Investors in mutual funds become shareholders of the fund, meaning they have voting power in the corporation.
Unit Investment Trust Funds, or UITFs, much like mutual funds, are ready-made investments from pooled funds. Investors gather together to form a Trust Fund, which will be handled by an expert. Investors in UITFs, however, do not become shareholders of the fund, but rather hold units of the investment. Unlike mutual funds which need to be processed through their respective companies, UITFs can be found in many commercial banks.
In addition, mutual funds and UITFs typically offer different types of funds and investments, including money market funds, bond funds, and equity funds. These funds cater to individuals with different risk appetites. It is recommended that investors speak with fund representatives to figure out their risk tolerance before investing. By understanding the risks involved in these investments, the budding investor can take the funds best suited to his lifestyle.