Question: HI, I’ve recently decided to start investing, but I don’t know which product I should choose. Should I invest in variable universal life insurance, a mutual fund, UITF or buy stocks? —Asked by Josiah via Facebook

Answer: First of all, congratulations on taking this important step in your journey to financial peace! But the question of which product is right for you depends on where you are in life and what your goals are. While I can’t make any specific recommendation because I don’t know more about your financial situation, I can give you a broad overview of each product you mentioned to help you make the right decision.

I’m an advocate of life insurance, which is something Filipinos sorely lack. Variable life insurance (or VUL) is a product you can consider if you need both insurance and investment. VUL will give you insurance benefits but it will also have a fund that is being invested according to your objectives, risk profile and other preferences. If there are already people depending on your income, you should get a life insurance policy. But if your sole objective is purely investing, then this may not be the right instrument for you at this time, because in the first couple of years of your policy, most of your money will actually go toward premium payments.

If what you want is to put all your money in investments, and your risk tolerance is moderate to high, UITFs and mutual funds can work for you. A big advantage of these is that they are professionally managed by experienced investment managers, who are trained to invest properly. Even if you yourself are not well-versed in investing, you can rest assured that you’re in good hands.

The main difference between these two is that UITFs are offered by banks, while mutual funds are their own companies. By buying into a UITF, you own units of this fund. By buying into a mutual fund, you own shares and become a shareholder in the mutual fund company. All your earnings are net of tax and fees as represented by the NAVpu (net asset value per unit) for UITFs and NAVps (net asset value per share) for mutual funds.

When it comes to these pooled funds, you can choose from a variety of investments for every risk appetite. You can also choose among actively managed funds, where a fund manager tries to beat the index, or passively managed funds, which simply try to match the performance of an index.

In more economically advanced countries, passively managed funds match or outdo the performance of actively managed funds because those markets are already efficient. However, in younger markets like in the Philippines, active fund managers can still perform better than the index because the market is not efficient yet and there are still advantages they can leverage.

However, investing in mutual funds and UITFs comes with some disadvantages. The management costs can be significant, going to up to 2 percent. For UITFs, sometimes the bank branch staff aren’t trained to handle inquiries, and some of them might even discourage you.

Mutual funds and UITFs will work for you if you don’t need the money right away and can stand risk, but don’t have the time to learn all about stocks. They’re also a good vehicle for retirement funds because the long-term nature of your need will allow you to weather the fluctuations of the market. I’m encouraged by the good performance of many funds over the last few years, but keep in mind that past performance is never an indication of future performance.

Now we come to the elephant in the room: stock investing.

Individual stocks come with a lot of advantages: you have direct control over what you buy, unlike in a pooled fund that is automatically diversified. You get residual income if you buy a stock which pays out good dividends. Your returns are maximized because you’re not paying management fees, and if your individual stock outdoes the market, you make money even if the market as a whole is going down. And if you choose the right balance of stocks, your portfolio’s growth can outperform the index.

But! Before you start counting your chickens, know that stock investing is not easy to get into. You’re going to have to spend a lot of time learning about how it works. You’ll also have to learn fundamental and technical analysis, spending time reading financial reports from the companies you want to invest in and learning market trends to make the best investment choices. And to be properly diversified, you’ll need to start with a big capital; otherwise, you’ll be limited in the kind of stocks you can add to your portfolio.

Bottom line: if you want the protection of life insurance, go for a VUL. If you want to participate in the growth of the Philippine economy but don’t have the know-how to go into stocks, choose a mutual fund or a UITF.

If you have the time to learn, money to invest, and aggressiveness to match, stocks may be for you.

There are a lot of options for you if you want to start moving your money out of a savings account and into a product that can work harder for you. If you are a new investor, I recommend you invest in a pooled fund first as you learn how the stock market works and develop your competency in investing. Once you’re confident that you’ve learned enough, then you can invest in the stock market.

Whatever undertaking you choose, it must have a good foundation—this is true for investments as well. Develop your base of good money management, savvy saving, and common sense, and this solid foundation will bring you real prosperity.

There has been a lot of anxiety with what’s happening in the equities market. External forces have affected the local bourse and many investors are jittery. China, Greece and a slowing down of the economy has largely contributed to some declines lately.

The equities market are behaving the way it is supposed to behave, it goes up and down and it is largely sentiment driven. How about mutual funds? Are the fund managers doing their jobs in ensuring growth in their funds despite the volatility?

I recently checked out how the mutual funds are doing and I am happy to note that while the short term gains are very minimal, even losses for some funds, many funds are doing admirably when you look at them from a long term perspective… say 5 years. I have always subscribed to the belief that investing in the stock market is more about time and less about timing — time in the market is better than timing the market. Of course many traders will disagree but my purpose of going into the equities market has always been from an investors perspective and not of a trader.

When investing in pooled funds like mutual funds or UITF, it is best that you do so with a long term perspective — the longer you stay, the better it is! I recommend that you stay invested in your funds for as long as you can, and you only redeem them when you have already hit your objective. It is always best to know what your investment objectives are, as well as your time frame and risk tolerance. Once you have established them and invested your money, don’t react too much with how the market moves and always view your investments from a long term perspective. It will make you less jittery and it will keep you sane, trust me!

Below is a summary of the top 5 mutual funds in the last 5 years. Always remember, however, that past performance is not an indication of future performance — today’s top performer can be tomorrow’s laggard. A strategy I use is peso cost averaging — I invest in a monthly basis regardless of where the market is. But, whenever the market dips and I have investible funds, I try to buy more. It may not be the best strategy but it is a strategy that works for me. Of course, always remember to diversify your investments.

Happy investing!

QUESTION: I am ready to start investing and I would like to invest in equities. Is it better to invest in stocks directly or through pooled stock funds like UITF or mutual funds? —Name withheld per request, asked via e-mail

Answer: As a financial and investment planner, we need to subscribe to the principle of suitability. Without sufficient information, it wouldn’t be prudent of me to categorically say one would be better than the other. The answer really depends on you—if you are knowledgeable enough to select your own stocks, size of funds, and if you have enough time for investing.

However, to help you make a more informed decision, let’s discuss the advantages and disadvantages of both types of investing.

On individual stocks

Advantages :

Control—Buying your stocks directly gives you control over what and when to buy or sell.

Residual income—If you buy a stock with a good dividend payout, then you don’t have to watch the price movement anymore. As long as the company is earning and declares dividends, you will get dividends.

Maximized returns—individual stocks that are growing may beat the market and can give you better-than-average returns. Many stocks beat the index last year.

Potentially better returns—with proper selection and assuming that you are very good at selecting market performers, the growth of your own stock portfolio can outperform the stock market index and many stock funds.

Fees—buying your stocks directly from brokers usually means lower fees as fund managers charge a higher investment management fee compared to stock brokers.

Disadvantages :

Time-consuming—before investing, you should spend enough time thoroughly understanding how stock market investing works. You should also accumulate enough knowledge of both fundamental and technical analysis.  Fundamental analysis means you must be able to read and understand financial reports of the companies you would like to invest in, the general condition of the industries and market trends to which these companies belong to, general knowledge of macroeconomics and even the management of the corporations you would like to own shares of, etc. Technical analysis will require you to constantly study charts on price averages, trading volumes and a multitude of technical market theories like Dow theory, Relative Strength Index, Elliott Wave theory and more. While fundamental and technical analysis is not rocket science, it takes considerable time for you to learn them properly. Enrolling in a class like Marvin Germo’s Stock Smarts is a good way to start.

Diversification—all investment professionals will always recommend you to diversify. No amount of study and good performance in the past will guarantee the performance of a particular stock in the future so having several and properly selected stocks is always a prudent thing to do. Unless you have a very big capital for investing, you will be limited to the variety of stocks you can carry in your portfolio.

On stock funds

Advantages :

Professional fund management—this is perhaps the biggest advantage of pooled funds like UITFs and mutual funds. There is a dedicated team of investment experts that looks at investment opportunities and is investing the money according to the investment objectives of the fund. It is common to see CFAs or Certified Financial Analysts leading or being part of these investment teams. Good fund managers are clinical and logical investors and are not easily swayed by emotions as compared to individual investors.

Capital requirements—most of pooled stock funds have low capital entry requirements. One can invest in a fund for as low as P 5,000 to P10,000, with other providers requiring a monthly contribution of as low as P1,000 per month.

Diversification—all stock funds carry well-diversified stocks in their portfolio, usually blue chip or premium stocks. Since these are pooled funds, there are economies of scale in place; fund managers will be able to purchase different shares. Proper diversification will ultimately result in reduced portfolio risk.

Disadvantages :

Fees—While not all stock funds charge the same range of fees, these fees are usually much more than broker fees as there are costs involved in managing funds. Some funds even charges entry and exit fees, which can reduce the returns of your investments. Some funds are being sold through agents and advisors and commissions would need to be paid to them.

Control—you have no say on which funds you want or don’t want in your fund as this is already delegated to the fund managers. You also can’t modify the weight of the stocks inside a stock fund as fund managers follow maximum exposure limits per stock to ensure proper risk management practices. Even if you want more PLDT or Jollibee shares in your portfolio, your fund will only have a limited exposure to said stocks, like 10 percent.

The answer to your question is dependent upon you knowing the pros and cons of individual stock investing or through a pooled equity or stock fund. If you are a new investor, I recommend you invest in a stock fund first and as you get to understand how the stock market works and develop your competency in investing, you may want to start investing in individual stocks. There are no perfect investments and there are many ways to build your wealth, chose a strategy that you will be most comfortable with.

Do not forget, whether investing in stocks by yourself or through a fund, it pays to invest first in investment education.