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Investment Guide

Van Joseph F. Capili, RFP Financial Consultant

Table of Contents




Simplified Steps to Financial Planning


Types of Risks in Investing


Investment Instruments


Equity Investments


Government Securities


Professionally Managed Funds


Mutual Funds




Variable Universal Life


Endowment Insurance


Pre-Need Plans


Real Estate




16 Real Estate 17 Business I NVESTMENT G UIDE Financial planning is a process, a process

Financial planning is a process, a process

where you stop working for every peso

and learn to start putting your money to

work for you.

We always dream for our hard-earned

money to accelerate faster than the rate

we are spending. This is because we hope

that someday our money can sustain for

itself, without us having to work hard

for it. How can we then accelerate our


In kinematics, acceleration is the change

in velocity over time. In terms of

investment, acceleration can be likened to

the rate of return we get from investing.

There is definitely a greater chance for

our money to accelerate when we invest it

rather than just saving it.

While savings are generally held in the

short term, investments have a longer time

horizon. Just like a speeding car gaining

momentum, the highest returns can be

achieved in the long-term when the speed

has become self-sustaining and the

momentum picks up.

highest returns can be achieved in the long-term when the speed has become self-sustaining and the






A. Investing Tips

1. Understand Investment Concepts. First, it is imperative for a

starting investor to fully understand the concept of risk-return trade-

off. This means the higher the risk, the higher the return. In order to beat inflation, one must be willing to assume an appropriate level of risk in investing. Second, one must apply the tried and tested principle of diversification. Diversification requires investing in

various investment instruments of different categories so as to reduce the impact of risks in your overall portfolio. This technique allows you to avoid negative returns brought about by the performance of a single security. Third, one must learn how financial markets work, such as the stock and bond markets. All investments have their corresponding risks. What is important is that one must know where his money is being invested. Fourth, one must realize the impact of inflation in his finances and perceive inflation as the hurdle rate to beat when shopping for


investment/asset management companies, insurance companies, pre-need companies, stock brokerage firms etc. and choose only to partner with those who are known for there long-standing reputation, credible fund managers and stable financials.













2. Identify your future financial goals and objectives. They must be realistic and measurable. Drop the old thinking of leaving your money in an investment and forgetting all about it until the time has come to withdraw. Nor throwing in loose money to investments just to ‘try’ and ‘play the market.’ Invest for a purpose. Ask yourself the following questions: (a) How much will I need? (b) What will I need it for?

3. Determine your investment horizon. When will you need it?

4. Evaluate your resources. Construct your own personal income-expense statement on a

monthly basis and determine if you have any excess funds/ disposable income or discretionary income. If you have expense-related problems, solve that one first by managing your expenses. You need to create free cash flow first before investing. Don’t invest funds allocated for basic needs. Assess how much money you are prepared to invest. Consider monthly obligation.

Annual Income

Annual Expenses

Earned Income


Standard Expenses


Salary, the client 13th Month Pay


Utilities: Cellular phone Water Electricity Telephone Transportation: Gas Insurance Maintenance Driver's Salary


50,0 00




Passive Income Rent from Townhouse







Total Annual Income Total Annual Expenses





Disposable Income


Home: Groceries



Household Supplies Maintenance Educational Expenses: Son Niece Brother Self Pension Plan


Annual Expense ‐ Income Ratio


Total Annual Expense Total Annual Income Expense Income Ratio






3 0,000




Discretionary Expenses


Dining Out Movies Vacation Clothing Donations Club Membership Fees Gifts Total Annual Expenses











I NVESTMENT G UIDE 5. Ascertain how much risk you are willing to take. This is

5. Ascertain how much risk you are willing to take. This is important since you will be matching

your risk tolerance to the appropriate investment product that enables you to sleep at night. The

table below shows the investment profile of certain age groups.

Age Group

Risk Tolerance

Investment Time Frame

Investment Goal

Generally Preferred Investments


– 35

High Risk: Aggressive

10 - 30 years holding period

Capital Appreciation; Long Term Growth

Equities, Equity Funds


– 50

Moderate Risk: Balanced

5 – 10 years holding period

Capital Appreciation & Preservation

Medium Term Notes, Balanced Funds

51 onwards

Low Risk: Conservative

1 – 5 Years holding period

Capital Preservation; Regular Income

Bonds, Bond Funds

6. Evaluate investment options. Rummage through financial data in the Internet and consult

financial advisors. Evaluate financial products according to the following criteria:

a.) Potential Return. How much can you reasonably expect based on historical returns? b.) Safety. What are the risks involved? c.) Liquidity & Marketability. Can I readily convert my investment into cash? Are there penalties for pre-termination? d.) Minimum Investment Amount. How much money are we talking about?

7. Develop your investment plan.



Time Frame



Investment Product

Purchase of a 30 sqm. Condominium Unit at Grand Soho Makati

Down payment of Php 500,000


Php 100,000 initial investment in Bond Fund &

Mutual Fund with an Average Return of 15% YTD (based on historic returns)


years to go

Php 5,000 subsequent monthly investments up to year 5

Child’s Education at Ateneo de Manila University

1 st year college tuition of Php 150,000


years to go.


Educational Plan with Dividends Education Benefits of 600,000 for 4-Year College Course (150k/yr.)

Your child is 7 years old.

Php 40,000 annual installment for 10 years

Wedding Expenses at San Agustin Church + honeymoon expenses

Total costs of Php 250,000 inclusive of 2 days, 3 nights in Hong Kong


Php 200,000 investment in 3-year FXTN (fixed

Treasury Note with coupon payment of 8% paid semi-annually Coupon rate depends on prevailing interest rates.


years to go.

exchange treasury note) with coupon payment of


Protection Needs for my spouse & dependent parents in case of emergencies

Php 3 million protection needs

Indefinite time

Php 67,410 annual premium investment for whole life insurance

Investment-Linked Insurance with Face Amount of Php 3 million




years to go

Php 420,000 in Savings Account Php 84,000 Annual Installment for Pension Php 8.9 M-worth Rental Property Php 209,000 Annual Premium in VUL

Peso Savings @ 1.5% p.a. Pension Benefits of 1,000,000 Real Estate @ 7% p.a. Variable Universal Life Insurance Face Amount of Php 8,460,606

Retirement Funding At Age 65

Php 300 million lump sum at age 65

till retirement.

Bond Fund:

initial Php 1M subsequent 18,524/ month

Peso Bond Fund Peso Balanced Fund Peso Equity Fund

Balanced Fund: initial Php 1M subsequent 39,428/ month

Equity Fund:

initial Php 1M subsequent 8,072/ month


8. Implement your plan. Transact only with licensed agents or SEC-certified investment

solicitors. Locate the company’s principal office and know everything that has to be learned.

9. Evaluate your plan every now and then. Some financial needs change as years go by. This

may be due to inflation, laws & regulations governing taxes and changes in personal circumstances such as having a baby. Anyhow, an investor needs to constantly update his investment plan and rebalance his portfolio to match with his changing needs.


B. Types of Risks in Investing


B. Types of Risks in Investing I NVESTMENT G UIDE Let us examine more closely the

Let us examine more closely the various risks associated with investing in certain investment instruments. Professionally managed funds try to eliminate, reduce or manage these risks.

1. Market Risk is the risk associated with the volatility of stock prices.

2. Sector Risk is the risk that investments in a particular industry sector may experience economic, market downturns due to factors such as cyclical booms & busts, regulatory restrictions or industry scandals. This can be minimized by investing in several sectors.

3. Liquidity Risk is the risk that an investment may not find a ready buyer or that it may have to be disposed at a substantial loss. Prices of long term bonds are more susceptible to this type of risk for when you decide to sell your bond in the secondary market, you need to sell it at a time when interest rates are low. With low interests, investors will perceive your bond as the better deal. Otherwise, when you sell when interests are high, you have to sell it at a loss.

4. Interest Rate Risk refers to the volatility of bond prices that result from changes in interest rates. The price of a bond is inversely related with its corresponding interest rate.

5. Credit/Default Risk refers to the creditworthiness of the bond issuer and its expected ability to pay interest and to repay its debt. Government securities are said to be default-free because the government can always print more money to repay its debt. Likewise, it has the unique taxing power that ordinary corporations don’t have. To eliminate credit risk, one ought to invest in investment-grade bonds.

6. Purchasing Power/Inflation Risk is the risk that the value of your money in real terms will be less than the purchasing power of your original investment. This occurs when your investment cannot hurdle with the current inflation rate. An example would be fixed-income securities whose interest rates are consistently below the rate of inflation. On the other hand, equity investments are a good hedge against inflation.

7. Call/Prepayment Risk is the possibility that a bond will be called away from the investors by the issuer before its maturity date. This happens when interest rates are low. As a consequence of the call made, the bondholder will no longer receive interest payments (coupon payments) and will receive a lump sum price of his bond. He is now forced to reinvest this lump sum proceeds at lower rates.

8. Currency/Foreign Exchange Risk is the risk that fluctuations in the exchange rates may negatively affect the value of the fund’s investment. This is true when the investment is denominated in another currency.

9. Country/Geographic Risk refers to the possibility of decline in the value of investments in other countries due to socio-economic factors such as wars, rebellion, social unrest, political instability, economic slowdowns and other regulatory changes. This will lead to the fund’s inability to liquidate its investments in that particular country.

10. Management Risk is a type of risk associated with actively managed forms of investments wherein investment decisions are made by portfolio managers who have the propensity to commit mistakes in the selection of issues, allocation of assets or timing of purchase and sale. This would result to the fund’s underperformance, decline in value or even loss.





I. STOCKS or EQUITY INVESTMENTS I NVESTMENT G UIDE Basics: Stocks are shares of ownership in

Basics: Stocks are shares of ownership in corporations. By buying a stock, you become a part owner of a company. One may profit from stock investments through (1) capital appreciation of stock prices since these are subject to market fluctuations. An investor earns a profit if he is selling at a price higher than his original purchase price. Another source of income is through (2) dividends declared by the board of directors. The latter is not guaranteed and is up to the discretion of the board of directors. Dividends can be a source of regular income especially if the company has a reputation of giving out dividends regularly. They are usually expressed in terms of dividends per share. (i.e. 50c per share)

Goal: Capital Appreciation

Example: John purchased 100 shares of Jollibee last August 27, 1999 at the prevailing stock price of Php 34 per share. He paid roughly an additional of Php 250 in fees. So his total investment value is worth Php 3,400. Here is the computation:


shares x 34 per share

= 3,400




Total Cash Outlay

= 3,650

Dividend: If the Board of Directors of Jollibee declared a 50c per share dividend for the year 2000, John will receive Php 500 worth of dividends. Here is the computation:

100 shares x 50c dividends =


Total Additional Income



Capital Appreciation: If John decides to sell his Jollibee shares today August 27, 2001 at the prevailing stock price of Php 45 per share, he has a capital gain of Php 680 or an annual return of 9.3%.


shares x 45 per share

= 4,500




Total Cash Received

= 4,330

Rate of Return = 4,330 – 3,650

= 680


Rate of Return = 18.6%


Annualized Return = 9.3% p.a.

Note: Retail stock investing requires constant monitoring of stock prices and buy/sell signals. The real disadvantage of buying stocks on your own is the fact that you are burdened with hefty fees, whereas, professionally managed funds enjoy a bargain on fees since these are institutional buyers buying in bulk. Also, if you don’t have the technical know-how and time for investing in stocks then, you’d be better off investing in professionally managed funds where competent investment managers can administer your fund. This is why ‘hassle-free investing’ is the selling point of managed funds.

Several fees are imposed upon the consummation of orders sent to the Philippine Stock Exchange (PSE). These include brokerage commission, transfer fee, cancellation fee & stock transaction tax.

Procedure: One may approach a stockbroker who can accommodate single-stock transaction. For instance, if one intends to purchase Jollibee shares, he can give his 5,000 directly to a PSE-accredited broker. Another option would be to open an online brokerage account with an initial investment of Php 25,000. This allows you to purchase stocks online by first opening an account. You may invest all your deposit money in different stocks or partially invest some while retaining a portion for liquidity. You have the freedom to allocate your deposit funds in an online brokerage firm. You can do this in the comfort of your homes. Fees are

to allocate your deposit funds in an online brokerage firm. You can do this in the


charged usually at 0.25% (industry-wide).


charged usually at 0.25% (industry-wide). I NVESTMENT G UIDE Trivia: The PSE Composite Index is a

Trivia: The PSE Composite Index is a measure of stock movements of a set of 30 companies, usually the most actively traded. It shows the general performance of the market during that day. In this case, the market is up by 14.16 basis points or .1416%.

Risk & Strategy: Equity is generally perceived as risky investments due to market risks involved. Thus, holding period for this investment should be long term, at least 10 years onwards, unless, if one is a technical trader. A technical trader is one who takes advantage of one-time highs & lows of the market and performs an occasional buy & sell in the short term. So if he purchases shares in the first week of the month, expect him to sell on the third or fourth week, after reaping huge returns. A lot of reinvesting occurs within a year for a technical trader while a fundamental trader believes in the intrinsic value of the stock and is willing to wait for years until he sees it to be overvalued.

and is willing to wait for years until he sees it to be overvalued. Source:


and is willing to wait for years until he sees it to be overvalued. Source:




I NVESTMENT G UIDE II. GOVERNMENT SECURITIES (Treasury Bills, Notes, Bonds) Basics: Government Securities are

II. GOVERNMENT SECURITIES (Treasury Bills, Notes, Bonds)

Basics: Government Securities are unconditional obligations of the sovereign state. It is backed by the full taxing power of the sovereignty. Therefore, government securities are practically free from default or non-payment of principal. They pay out interest to the bondholder during coupon payment dates and return the principal at maturity. These securities have a face amount, coupon rate, term and purchase price. There is also a 20% final withholding tax imposed on its transactions.

Goal: Regular Income, Capital Preservation

Example: You invested Php 100,000 in Fixed Exchange Treasury Note (FXTN) with a coupon/interest rate of 8.5% but since this is subject to 20% tax, the real return is only 6.8%. Maturity is after 5 years. Coupon payments are paid semi-annually.

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5







You invested 100,000 today and receive 3,400 semi-annually. You will get your 100,000 back on the fifth year together with the last coupon payment.

Note: These may be purchased from Government Eligible Securities Dealers (GSED’s) and banks, usually at a minimum investment of Php 100,000. For Retail Treasury Bonds (RTBs), they are not offered regularly. But once the government makes an offer, it will be publicized. During the initial offer, minimum investment can go as low as Php 5,000. So, it’s generally more expensive to buy from banks than from government offers.

Earning Potential: One can earn through (1) interest income from the coupon rates stipulated in the security. In the above case, the interest income is 6,800. One can also earn (2) trading income when securities are bought or sold from the secondary market. For instance, if you do not intend to wait for year 5, you may choose to sell your FXTN if the prevailing market price for a 5- year FXTN is higher than 8.5%. If the current market price is 9.1%, then you get a capital gain.

Risk: Since interest rates vary from time to time, bonds and bills are then subject to interest rate risk when prematurely redeemed. The interest rate risk is just an opportunity risk. It means that an investor would have bought the same bond for a higher coupon/interest rate if he waited for 6 months or some duration. The risk can adversely affect your bond investment if you decide to sell you bond before its maturity, especially when the interest rates are higher than your original yield.

Historical Prices for 5-Year FXTN (Illustration Only)













You bought a 5-Year FXTN at 8.5% in 2004. You can profit by selling your note to other investors before maturity at 2009. You can sell it at a profit in 2007 or 2008. You do not sell in 2005 or 2006 since the interest rates are higher than what you have paid for in 2004. No one will buy your 8.5% bond because the current yield is at 8.9% and 9.1%. On the other hand, if you sell in 2007, investors are willing to buy your 8.5% bond than buy the new ones pegged at only 6.5% and 8.4%. The buyer-investor will receive the remaining interests on your behalf while you get the lump-sum value of your treasury note.

They are considered relatively safe investments, theoretically deemed risk-free because upon purchase of the bond/note/bill, the interest rate stipulated is already fixed. Holding period would depend on the maturity of the retail treasury bond (long term), treasury note (medium-term) or t-bill (short term.) Treasury Bills (T-bills) and Fixed Rate Treasury Notes (FXTNs) are auctioned regularly by the Bureau of the Treasury (BTr). T-bills are auctioned fortnightly, usually Mondays. FXTN auctions are held each Tuesday.

Terminologies: Government securities are termed based on their maturity.

Treasury Bill

91-day, 182-day, 364-day (less than a year)

Treasury Note

2 – 10 years

Treasury Bond

more than 10 years



I NVESTMENT G UIDE Trivia: According to economists, the main reason why sovereign bonds are theoretically

Trivia: According to economists, the main reason why sovereign bonds are theoretically safe is because if the government cannot pay, it can just print money to pay bondholders. This is one of the advantage of government bonds over corporate bonds. However, needless to say, such action may affect inflation (at least, investors get paid though.) While they are deemed “risk-free,” there are some countries that have already default in their interest payments on their treasury bonds such as the famous Argentinean Bankruptcy when Argentina could no longer pay investors. IMF has to resolve the issue by infusing capital to the troubled country. It just goes to show that default is a possibility.

country. It just goes to show that default is a possibility. Source: Source: Bureau of


country. It just goes to show that default is a possibility. Source: Source: Bureau of

Source: Bureau of Treasury




I NVESTMENT G UIDE III. PROFESSIONALLY MANAGED FUNDS Overview: Professionally managed funds are pooled investments

Overview: Professionally managed funds are pooled investments administered by an investment manager who has competent knowledge on fundamental and technical analysis. The main advantage of investing in professionally managed funds is access to global and technical expertise. An investor is given access to professional trading which makes use of cutting- edge research technology. For those who are not attuned with the ins and outs of financial markets, it is recommended to entrust your investment to reputable fund managers.

to entrust your investment to reputable fund managers. Also, other advantages include higher bargaining power in

Also, other advantages include higher bargaining power in terms of fees and interest rates from fixed- income instruments/bonds. As an institutional investor, mutual fund companies buy in bulk. This grants them the right to haggle with brokerage firms. Likewise, since the funds total asset holdings is huge, an investor can take advantage of instant diversification.

Goal: Long-Term Growth

Minimum Board Lot: Let’s compare the 5,000 investment in mutual fund with an investor who has 5,000 and invests everything in Jollibee shares. The main constraint for the individual investor is that he cannot invest 5,000 in different securities because of the minimum board lot rule. Basically, one is permitted to transact in the stock market at minimum required levels. For instance, 10 shares is the minimum for the purchase of PLDT while 100 shares is the minimum for Jollibee. In a mutual fund, you do not worry about the minimum board lot rule since your investment is mixed with a pool of investments. As a consequence, your 5,000 can be invested in multiple companies. Likewise, you can get a proportional gain from capital appreciation. In other words, your 5,000 can go a long way.

Disadvantages: Yet, one disadvantage of professionally managed fund is that there is lack of control on the investor’s part. He can’t decide what specific securities the fund should invest in nor dictate the exact mix of stocks and bonds. Another disadvantage are the fees from the management, maintenance of records, publication of annual prospectus and other transaction-related expenses such as redemption fee & dividend reinvestment fee. These are levied regardless of the performance of the mutual fund.

The different types of professionally managed funds include mutual funds, unit investment trust funds (UITFs) and variable universal life (VUL) or investment-linked insurance.

A. Mutual Funds

Basics: A mutual fund is an open-ended pool of investments wherein it pools money from several investors and invests the money in stocks, bonds, short- term money market instruments and other securities. These are managed by professional fund managers who trade the funds underlying assets. The different types of mutual funds include (1) Equity Fund (2) Bond or Fixed Income Fund (3) Balanced Fund (4) Money Market Fund. Transaction fees are either front-end load or back-end load. The advantage of mutual fund is that for a minimum investment of Php 5,000 or Php 10,000, one can avail of diversification, professional management of funds, cost efficiency and liquidity. One can choose the type of mutual fund that suits best his or her investment profile. Mutual funds are bought at unit or index prices which also fluctuate daily based on the underlying assets.

profile. Mutual funds are bought at unit or index prices which also fluctuate daily based on



I NVESTMENT G UIDE Types of Funds: Fund Description Equity Fund This is invested primarily in

Types of Funds:



Equity Fund

This is invested primarily in shares of stocks which are generally volatile and subject to market risk.

Balanced Fund

This is invested in both shares of stock and debt instruments or bonds.

Bond Fund

This is invested mainly in long-term debt instruments and subject to interest rate risk.

Money Market Fund

This is invested in purely short-term debt instruments and yield relatively lower returns.

Options: The locus of control for mutual fund investment is the investor himself. Only he can decide on strategies to reach his goal of maximizing his earning potential. There are several transactions that a mutual fund investor can perform in his investment to achieve this goal. The investor has the option to switch funds whenever he decides it would be best to allocate all his investments in bond funds or in equity funds, depending on the relative performance of the stock and bond markets. Also, an investor may add subsequent investments to his chosen mutual fund usually at denominations of 1,000 or 5,000. Another way of earning in mutual funds is through dividends declared by the board. The investor may opt to reinvest his dividends to purchase additional shares of mutual funds or encash the dividends.

Wealth of Advantages:

1.) Professional Management: Take advantage of full-time services of professional fund managers who shall administer your investment portfolio.

2.) Potentially Higher Returns: Since it pools money from several investors, you can take advantage of economies of scale plus a higher bargaining power on our fund managers to negotiate for lower stock brokerage fees and command high interest rates in bonds since we are buying in bulk.

3.) Liquidity: Investment company stands ready to buy back your shares whenever you decide to liquidate. One can withdraw his mutual fund shares at the prevailing net asset value per share.

4.) Low Capital Requirement: Minimum initial investment of P5,000 to P10,000.

5.) Convenience: Monitor your investment through the internet since the fund's NAVPS (net asset value per share) is computed on a daily basis. Also, regular mail is delivered to the investor, informing him of his actual return from inception.

6.) Diversification: Avail of instant diversification with a minimal investment as your premium is invested in a wide array of securities. (i.e. PLDT, BPI, Globe and other blue-chip companies that offer regular dividends)

7.) Safety: SEC-regulated, prohibited transactions on sale of margin securities, precious metals, unlimited liability companies, the requirement of a custodian bank for safe-keeping of assets.

The Players: First, the fund shareholders are the owners of the fund and are entitled to the unique right of redemption. Second, the board of directors is responsible for the overall operations of the fund. They decide whether or not to declare dividends for the shareholders. Third, the investment adviser or the management company performs the advisory function, deciding what securities to trade and the administrative function, facilitating accounting, bookkeeping and compliance with legal requirements. They receive management fee as their compensation. Fourth, the distributor is mainly responsible for selling the fund’s shares. It derives its income from the front-end and back-end loads. Fifth, the custodian or the transfer agent is a commercial bank that holds the fund’s assets. This is established in order to avoid conflict of interest from the one managing to the one safekeeping the assets. Last, the independent auditors review the financial statements of a company and evaluate their valuation methods. All of their functions are necessary to maintain credibility and transparency for investors.



I NVESTMENT G UIDE Taxation: Upon the issuance of shares, the fund pays a documentary stamp

Taxation: Upon the issuance of shares, the fund pays a documentary stamp tax (DST) at the rate of Php 1.00 on each Php 200.00 value of shares. Other fees include stock transaction tax, capital gains tax of 5% on the first Php 100.00, 20%final withholding tax on interest income and corporate income tax. Dividends received from domestic corporations are not subject to tax.

Computation of NAVPS: The NAVPS is computed on a daily basis. Everyday, the value of total assets varies depending on the performance of the underlying investments such as stocks and bonds. It is then deducted with liabilities coming from payables such as management fees, redemption fees and other accrued expenses. When purchasing shares of mutual fund, the investment amount is divided by the current NAVPS to determine the number of shares bought. Upon withdrawal, the number of shares is multiplied with the prevailing NAVPS.

number of shares is multiplied with the prevailing NAVPS. Illustration: John has 100,000 investable funds. He

Illustration: John has 100,000 investable funds. He decides to invest in a Balanced Fund on Jan. 1, 2009 when the current NAVPS is P 1.5572. He bought 64,217 shares of Balanced Fund. On March 1, 2010, he redeemed his shares when the price was P 2.44, thereby, getting P 156,690 in proceeds.

NAVPS = Total Assets – Total Liabilities


102,418,695 – 3,918,004




Number of Shares Outstanding



P 1.5572
P 1.5572

No. of Shares Bought = Investment Amount Current NAVPS






Investment Proceeds = No. of Shares X Prevailing NAVPS


64,217 X 2.44


P 156,689.48

Peso-Cost Averaging: This strategy involves investing at different episodes in the market. An investor may choose to regularly deposit subsequent investments in his mutual fund in order to purchase units in both high and low points in the market. By doing so, an investor can average his returns. Since you are purchasing at different points in the market, you can smoothen out your returns. After averaging your investment returns, you’ll hardly see a negative figure. This technique is statistically proven in an ordinary market cycle.

B. Unit Investment Trust Funds (UITFs)

Basics: These are similar to Mutual Funds and VUL’s. However, these are managed by the trust department of banks. This product is offered to prime clients whom the bank maintains a total customer relationship. The UITF’s are also bought at unit prices. UITF’s as financial products per se are not regulated. However, the commercial banks that sell UITF’s are regulated by the Central Bank. A client must have a total of Php 100,000 in deposits before these can be transferred to UITF’s. UITF’s are sold by the bank’s customer representative. There is no need for licensing for these types of products for once the bank gets its trust license, it’s qualified to sell UITF’s. Here are the major differences between UITF’s and mutual funds.


Mutual Funds


Who is the issuer?

Investment Company

Trust Department of Banks

What instruments are issued?

Common Shares

Units of Participation

Do investors have shareholder rights?



What is the government regulatory agency?



Are assets to be held by an independent custodian?



Are they subject to full disclosure requirements?



Are they subject to reserve requirements?





C. Variable Universal Life Insurance (VUL)

NVESTMENT G UIDE C. Variable Universal Life Insurance (VUL) Basics: VUL is a non-traditional life insurance

Basics: VUL is a non-traditional life insurance. It is a life insurance + mutual fund investment rolled into one. The investment component of VUL insurance makes it a comprehensive investment since it offers both the protection from insurance and the wealth potential of mutual funds. Furthermore, it grants the investor the best of both worlds, namely, the variability of returns from mutual funds and the guaranteed insurance benefit. Truly, a sweet deal.


How it works: Annual premiums for the insurance will be used to purchase units of mutual funds. Professional fund managers also manage VUL funds. Since it works exactly like a mutual fund, withdrawals of the fund value can be made against the policy. Similarly, it has deposit features wherein a policyholder may put in excess premiums on top of his regular premiums for investment purposes. It has more or less the same set of funds being offered by mutual funds and are bought at prevailing unit prices. This hybrid instrument is truly cost efficient.

Illustration: For a 22-year old, VUL insurance is quoted at 7,793 annual premium for a Php 250,000 coverage. A VUL proposal includes an illustration of the fund’s performance at 4%, 8% and 10%. If, for instance, the policyholder wishes to withdraw his fund value at the age of 32, he may encash as much as 89,407 upon termination of his insurance. If he makes it up to retirement age, he can withdraw as much as 3,846,511 plus an insurance coverage between 22 to 65 years of age. But if something happens along the way, the assigned beneficiaries will receive the fund value + the guaranteed insurance of Php 250,000. No other legitimate financial product offers such double incentives.

value + the guaranteed insurance of Php 250,000. No other legitimate financial product offers such double





IV. INSURANCE I NVESTMENT G UIDE Basics: Insurance is a risk sharing business. A policyholder pays

Basics: Insurance is a risk sharing business. A policyholder pays yearly contributions to an insurer who will in turn, provide financial benefits upon death, accident or sickness. The insurance companies earn from first year premiums, renewals and investments under management. They must be liquid enough to service policy claims. The rules governing insurance are embodied in a special law called the Insurance Code of the Philippines and are regulated by the Insurance Commission.

Reasons for Buying: Here are some of the many reasons why financially intelligent individuals secure their future with the purchase of insurance products. Enumerated below are purposes of insurance. You can achieve this purpose by buying any traditional or investment-linked insurance.

by buying any traditional or investment-linked insurance. CONTINUING LIFESTYLE: A highly paid executive with a

CONTINUING LIFESTYLE: A highly paid executive with a wealthy lifestyle would buy insurance to maintain that lavish lifestyle between her widowed spouse and children in the event of his/her death.

BUSINESS INSURANCE: An insurance policy is used to buy out shares of the deceased partner or shareholder in the business so that such shares will not be passed on to the deceased's legitimate heir who has little or no knowledge about the business. Insurance used for buy-outs is a perfect protection against jeopardizing business functions with the entry of distant relatives or opportunistic strangers.

KEYMAN INSURANCE: Business-owners usually purchase insurance coverage on their top executive personnel in order to pay for the expenses incurred in his or her absence such as costs of hiring and training.

ESTATE TAXES: Upon death of an individual, he is required to pay the government hefty amounts of taxes on his or her gross estate. Otherwise, if he doesn't pay, then the properties cannot be conveyed, disposed of or sold. Sometimes, heirs are forced to liquidate the deceased properties at a discount if they have no cash readily available. They have no bargaining power over market values since they are required to pay the estate taxes within 6 months after the death of the testator. Estate tax rates could reach as high as 20% over and above a fixed tax figure for a certain estate bracket. Penalties for non-payment would include interests and surcharges that would compound if ignored.

PASSING ON GENERATIONAL WEALTH: As part of financial planning, insurance products go hand in hand with wills and succession. An insurance can provide cash for those people valued by the testator which may not be his family. A well-prepared holographic will can settle family disputes with regard the testator's wealth. Insurance can calm the troubled waters brought about by money squabbles as the intent of the testator is clearly manifested in the policies and wills.

OTHER FINANCIAL GOALS: Paying outstanding debts or home mortgages, preparing for education funding or retirement planning, funding a start-up business or travel can be accomplished by terminating an insurance policy and withdrawing its cash value or fund value. Its cash values may be withdrawn during the year when it shall be needed. Plus, from the time of purchase to the time of withdrawal, the policyholder is insured.

Earning Potential: Insurance is a financial product which means it also has earning potential that can be used as living benefits. Here is a summary of monetary returns arising from insurance products:

a.) CASH VALUE - is a portion of your insurance which is allowed to accumulate so as to be withdrawn as a living benefit upon termination of insurance prior to maturity. These are guaranteed amounts as shown in your life insurance proposal.

b.) INTEREST - is the fruit of accumulated cash values or endowment benefits that are not withdrawn and left in the company to accumulate.

c.) DIVIDENDS - are the residual profits given by the company to its policyholders in relation to the number of units of their policies. Dividends are independent of cash values and are given on top of cash values and interests. These are not guaranteed and are up to the discretion of the board of directors. They have the power to declare dividends. Usually dividend earnings would reach to an average of 6% p.a. Try shopping for insurance companies that regularly pays dividends.



I NVESTMENT G UIDE d.) ENDOWMENT BENEFITS - these are yearly monetary benefits given to an

d.) ENDOWMENT BENEFITS - these are yearly monetary benefits given to an enforced policy, usually valued at 6% of the face amount. One has the option to (1) offset current annual premium payment with the current year endowment benefits or to (2) leave it to the company to accumulate or to (3) encash these endowment benefits. Unlike dividends, endowments are guaranteed.

e.) LOANABLE AMOUNT - some insurance policies allow you to loan against your cash value. Such loans may amount to a percent of your total cash value at any given time. This amount, therefore, depends on your persistency in paying the annual premiums in order for you to avail a larger loanable amount.

f.) FUND VALUE - is a portion of your insurance which is used to purchase units in mutual fund investment. This has the upside potential of higher returns since they are based on the performance of stock and bond markets. On the average, stock returns are around 15% p.a. while bond returns are around 6-9% p.a. Given the variability in returns, the fund value is never a guaranteed amount, although, it has the potential for higher returns.

Illustration of Traditional Endowment Insurance: Here is an example of a traditional insurance with illustration of cash values that can be redeemed. This is a 1 million-coverage insurance made for a 21 year old, male, non-smoker. Annual premium is P 45,940. Cash values are guaranteed, therefore, given the low risk of traditional insurance, you expect to receive lower returns than investment-linked insurance or the VUL.

lower returns than investment-linked insurance or the VUL. This particular insurance gives you endowment benefits of

This particular insurance gives you endowment benefits of Php 60,000 after 5 years and every two years thereafter, for as long as your insurance is enforced. At the age of 65, with an enforced policy, you can redeem a minimum of Php 993,193 as your living benefit for retirement. Php 993,193 is a guaranteed amount but there is still a provision for dividends which is usually 6% p.a. so you could get about P 1 million for your retirement. At the same time, you were covered from age 21 to age 65. Talk about product bundling!

Rationale: Given the uniformity of your annual premiums, you can view insurance as a forced savings mechanism which trains you to practice discipline. So you see, insurance is much like your bank savings account in a way that you can earn interests and that you can also make a loan against your policy like you could make a loan against your time deposit. But insurance has an added advantage of variable returns from dividends and investment products. And while you are earning through your annual "forced savings," you are insured at the same time. Where else can you get that? So why put all your eggs in the banks?




V. PRE-NEED PLANS I NVESTMENT G UIDE Basics: Pre-need plans are guaranteed investments with usually low

Basics: Pre-need plans are guaranteed investments with usually low returns. These require the plan holder to pay installments for a fixed period (i.e. 5, 7, 10 years to pay.) Upon reaching a maturity date, he may then redeem the maturity benefit. Purposes for securing a pre-need plan may be for education funding, retirement funding, wedding plans or for starting a business.







10 Years to Pay, 10 Years to Mature Initial Education Benefit:


Annual Payment per Plan Term Insurance (10; 343000) Accidental Death (10; 343000)






Gross Contract Price:





Total Education Benefit:



Total Annual Installment Total Semi-Annual Installment Total Quarterly Installment Total Monthly Installment






























Total Surrender






Return of



Nov, 2008





Nov, 2009









Nov, 2010










Nov, 2011










Nov, 2012










Nov, 2013










Nov, 2014










Nov, 2015










Nov, 2016










Nov, 2017










Nov, 2018




22,750 *


375,314.00 *






Nov, 2019







Nov, 2020







Nov, 2021







Nov, 2022





Nov, 2023





Nov, 2024





Nov, 2025






Nov, 2026





Nov, 2027




# Initial installment includes Ps. 400 plan fee.


Exceptional Edge: Pre need plans yield fixed returns with the added monetary returns coming from dividends. There are pre-need plans that are ‘participating’ or those that allow plan holders to participate in the distribution of the company’s residual profits. Then again, dividends are not guaranteed and are up to the discretion of the board of directors. Dividends may be perceived as icing on the cake for it offers an upside potential of additional returns. Pre-need products are invested by a trustee bank such as Deutsche and Citibank in money market instruments. So, generally the guaranteed returns derived from pre-need plans are similar with time deposits. However, other bonus features may elevate pre-need plans over old-fashioned time deposits. These include an insurance coverage during the payment period or the maturity period (it depends.) So if something happens to the plan holder, his beneficiaries will receive the accumulated installments already paid by the plan holder or the maturity benefit (it depends.) As mentioned, aside from insurance, it also gives out dividends.

Sample Illustration: This is a pension plan with a maturity benefit of 1 million after 30 years.

Guaranteed Payment Period: 10 Years Maturity Benefit: Php 1,000,000 @ age of 57

Total Cash Outlay: Php 473,576.40 Absolute Return: Php 526,423.60

Annual Installment: Php 47,318/year

Rate of Return: 3.71% p.a.




VI. REAL ESTATE I NVESTMENT G UIDE Basics: Real estate is real property consisting of land

Basics: Real estate is real property consisting of land and buildings. A lot of techniques

are being developed to take advantage of real estate. One may earn through passive

income by buying foreclosed properties and renting them out to tenants. In that case, you may receive monthly income stream without working for it. Or one may earn a hefty capital gain by buying a property at a low price and immediately selling it at high price which is a strategy called flipping. Flipping, of course, involves beautifying the property, in order, for the seller to appreciate a high selling price.

in order, for the seller to appreciate a high selling price. Procedure: One can purchase real

Procedure: One can purchase real estate properties from estate development companies for newly furnished and ready-for-occupancy (RFO) properties. Another option is buying foreclosed properties at good business districts from banks. An interested party should attend an auction for bank foreclosures. In both cases, payment terms maybe negotiated. However, the real estate owner is now obliged to pay for fees related to owning the property such as the property taxes etc.

Payment Scheme: Customarily, the purchase of real estate is financed by the bank precisely because land/property is a good collateral the bank can easily repossess. The prospective buyer may pay an

initial down payment of 20% of the property value. This will be his equity. The remaining 80% is financed by debt at a quoted interest and is secured by the issuance of post-dated checks (PDC’s). The

mix of equity-debt financing is actually decided by the financial institution, based on your credit rating.

Illustration: Generally, the 20% down payment is spread for a period of 18 months with 0% interest while the remaining 80% starts to be due and demandable on the 19 th month onwards, depends on the term of loan. For instance, if you purchase a Php 2.3 million 30 sqm condominium unit today and the term is for 6 years, this will be the payment schedule.

Your Amortization Schedule

2008 & 1 st 6 months of 2009

(20% x 2.3 M) = 460,000/18 months



/per month

Last 6 months of 2009

(80% x 2.3 M) = 1,840,000/54 months = 34,074 + interest/ per month


(80% x 2.3 M) = 1,840,000/54 months = 34,074 + interest/ per month


(80% x 2.3 M) = 1,840,000/54 months = 34,074 + interest/ per month


(80% x 2.3 M) = 1,840,000/54 months = 34,074 + interest/ per month


(80% x 2.3 M) = 1,840,000/54 months = 34,074 + interest/ per month

You may choose to rent out the condominium to prospective clients at monthly rates slightly above your amortization payments so as to get a profit.

Your Monthly Amortization

Rental Fee to Tenants (Your Income)





34,074 ++ interest


At Most 5,926

34,074 ++ interest


At Most 5,926

34,074 ++ interest


At Most 5,926

34,074 ++ interest


At Most 5,926

34,074 ++ interest


At Most 5,926

To determine you rate of return for 6 years, you add all your monthly income of (14,444 x 18) = 320,004 for the first 18 months and (5,926 x 54) = 259,992 for the remaining period, and divide it by your initial investment of 460,000 only, not the entire 2.3 million since your initial payment is just 25,556 on the first month. This is assuming you immediately got a tenant to pay for your amortizations.

Rate of Return = 259,992 + 320,004 = 579,996 = 22.7%



Rate of Return = 22.7%

Caveat: Imagine, with just an initial monthly amortization of 25,556, you get 579,996 in absolute returns in 6 years plus you are a proud owner of a condominium unit rentable! However, due diligence is necessary in real estate business. Check the viability of the location, do your math and learn the ropes of real estate documentation.





VII. BUSINESS I NVESTMENT G UIDE Basics: The wonders of business are unquestionable as there is

Basics: The wonders of business are unquestionable as there is really a potential for profits to compound. If investments have definite returns, businesses have infinite variable returns. This is because one can finance ones business through debt. The bank does not loan for the purpose of investing in stocks, bonds, mutual funds, pre-need plans and insurance. Thus, the debt financing for the start-up capital of any business is a major advantage which brings about infinite returns.

Why Infinite: The formula for determining rate of return is determined by dividing the capital gain/profit with the initial investment. If a businessman takes advantage of financial leveraging or borrowing resources for ones business operations, then he can achieve higher returns. All the more if the businessman has 100% debt financing for the capital of his start-up business.

Rate of Return = Capital Gain/Profit = Income – Expenditures

Initial Cash Outlay

Initial Cash Outlay

Since you borrowed all your capital, your initial cash outlay is 0.

Rate of Return = 50,000



Myth: Most businessmen believe that having a business will solve all their financial needs. This is far from the truth. In fact, all businesses are susceptible to risks. Owning a single business is a classic violation of the principle of diversification. In order to spread your risks in different types of assets, namely, portfolio assets, real assets and business assets, one must engage oneself in the financial markets. This is in order to maximize the earning potential of ones wealth. There are times when your own business is not doing well. Wouldn’t it be better to have some good-performing paper assets such stocks, bonds and mutual funds to fall back on? Or some income-generating rental property to support you when the stock and bond markets are down? Also, industry sectors do not collapse simultaneously. So when trouble sets in a particular industry, where your business is involved, you can rely on other income-generating assets in order for you to avoid a negative net worth.

Caveat: It is important however, that the right resources, system and strategy are contemplated in starting a business in order for it to gain momentum and use its profits to sustain its growth in the future. In conducting a business, whether a quick-service restaurant or manufacturing company or consultancy firm, there is a need for managerial skills and customer relations management to ensure business success and continuity. With ones initial capital, one may be able to build an empire just by revolving ones resources. An important caveat though is that: business requires the concurrence of core competence, passion and resources, as stated by Jim Collins in his book “Good to Great.”

Passion Core Economic Competence Engine