Question-   Introduction to Mutual Funds


Discussion 1: Intro to Mutual Funds


What is Mutual Funds?

  • A mutual fund is a form of financial vehicle that invests in securities such as stocks, shares, money market instruments, and other assets by pooling money from multiple investors.


Mutual Fund Flow Chart


History of Mutual Funds in the Philippines

  • The idea of mutual funds is not completely new in the Philippine industry, since it dates back to the early 1950s. The growing popularity of off-shore funds around the world prompted the development of Philippine mutual funds. The firms were licensed as finance companies and there was no controlling rule. Some took advantage of long-term investment plans that required participants to adhere to a set payment schedule (Php 50 per month for a period of 20 years).
  • The first year's investment acted as the commission, requiring investors to make more contributions before breaking even, far less making a return. Any of these businesses paid exorbitant sales commissions of up to 8%. A fund also paid a 50% front-end load.
  • Ka Doroy Valencia (a prominent and influential journalist at the time) publicly opposed the mechanism by which mutual funds were sold and operated at the same time as the stock market crashed in the late 1950s. Three of the four businesses that were open at the time later shut down. The Filipinas Mutual Fund was the only one left. It then became a banking firm, and then, much later, a construction company.
  • The government enacted R.A. 2629, also known as the Investment Company Act, in reaction to the first mutual fund debacle. The ICA included draconian measures that hindered the growth of the industry in general. It was modeled after US law but passed as a response to the recent fiasco.
  • Trinity Shares was the first corporation to file under the constitution, doing so in August 1969 and selling its shares publicly in October of the same year. The firm opened 11 stores in four months, doubling its monthly revenue and increasing its valuation by as much as 27 percent in the fourth quarter. Mr. Arthur B. Sokolow, the fund's driving force, was able to persuade Ka Doroy to not only invest in the new fund, but also to serve on its board of directors. Trinity's popularity prompted the registration of other funds, including Alfonso Yuchengco's Pacific and Malayan Funds and Ting Roxas' Bancom.
  • The stock market stayed small, despite the fact that such businesses tended to prosper. The domestic chaos brought on by the new dictatorial government, punctuated by the "first quarter storm," exacerbated the situation. This eventually resulted in capital flight, with the Manila Stock Exchange plummeting by 30%. Given industry's reliance on the latter, mutual funds that invest in part or all of the stock market live and die with it. Since there were no other investing options at the time, fund diversification was restricted. As a result, the Securities and Exchange Commission outlawed mutual fund sales entirely in 1973.
  • Trinity Shares, Malayan, and Pacific Fund all ceased operations as a result of this death blow to the mutual fund industry. Pacific and Malayan are both inactive. In 1979, PDCP purchased Trinity Shares, which was later purchased by Philamlife in 1993.
  • Specifically, the mutual fund industry's demise decades earlier can be traced back to the following factors:
  • a lack of government regulation
  • the country's worsening political and economic situation
  • a lack of alternative investment vehicles
  • an underdeveloped equity markets.
  • Recognizing the growing importance of mutual funds in the growth of capital markets, the Asian Development Bank commissioned a report on mutual funds by Jardines in the late 1980s. To restart the mutual fund industry, the SEC formed a taskforce in 1989 to oversee the creation of the ICA's Implementing Rules and Regulations (IRR). The IRR that resulted was published in October 1989 and went into practice 90 days later.
  • The IRR amended the current requirements of the legislation, raising the paid-up capital requirement from Php 500,000 to Php 50,000,000, introducing a 24-month holdout period, and expanding the number of mandatory audits to four per year. Many of these safeguards were put in place to safeguard taxpayers' and shareholders' rights.
  • The Galleon Fund (again funded by Mr. Arthur B. Sokolow) was the first corporation to file and begin selling shares under the current IRR on February 1, 1991. A few other investment firms followed suit, and the number of firms has grown steadily since then.


Types of Mutual Funds


Advantages of Mutual Funds

  • Advanced Portfolio Management
  • Dividend Reinvestment
  • Risk Reduction
  • Convenience and Fair Pricing
  • Liquidity
  • Transparency


Disadvantages of Mutual Funds

  • High Expense Ratios and Sales Charges
  • Management Abuses
  • Tax Inefficiency
  • Poor Trade Execution
  • No Control Over Assets

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