Republic of the Philippines

CAVITE STATE UNIVERSITY

Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

COLLEGE OF ECONOMICS, MANAGEMENT AND DEVELOPMENT STUDIES

Department of Management

FMGT 55: BANKING AND FINANCIAL INSTITUTIONS

GROUP REPORTING:

NON-BANK FINANCE

GROUP 6

Salazar, Bernadette

Santander, Marielle

Santos, Ma. Cazandra

Soteraña, Amiraj Somel

Tinga, Mariane Joyce

Urias, Leca

Volante, Lorraine

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

NON-BANK FINANCE

Non-bank is a financial institution and a company that offers financial services, but does

not hold banking licenses and therefore cannot accept deposits. NBFIs are not supervised by a

national or international banking regulatory agency. However, operations of non-bank financial

institutions are often still covered under the country’s banking regulations.

To understand we can compare them; here in the chart below, we can see in the top the

BSP or the Bangko Sentral ng Pilipinas, BSP are assigned to maintain the circulation of the

money here in the Philippines. Under BSP we have banks and non-bank. We know that banks

can accept deposits while non-bank banks cannot. Under them we have two categories:

government and private.

GOVERNMENT BANK FINANCE

Banks under government non-bank finance are DBP and Land Bank. DBP or

Development Bank of the Philippines provides a banking service principally to service the

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

medium- and long-term needs of agricultural and industrial enterprises, particularly in the

countryside and preferably for small and medium enterprises. Some of the major programs and

projects of DBP as of 2018 is Broiler Contract Growing Program (BCGP). This program aims to

encourage contract growers to expand their business by facilitating financing of poultry. Land

Bank of the Philippines is also a government financial institution and they focus on balancing in

fulfilling its social mandate of promoting countryside development while remaining financially

viable. In layman’s terms, these two banks under the government are helping poor people and

designed to mitigate hunger and promote food security. Landbank of the Philippines joined

forces with EPAHP or Expanded Partnership Against Hunger and Poverty with the same motive

- to mitigate hunger, promote food security, and reduce poverty in the country by year 2030.

PRIVATE BANK FINANCE

In the private sector, we have commercial banks where they accept deposits, offer

checking account service, make various loans and offer basic financial products like certificates

of deposits and savings accounts to individuals and small businesses. Examples are

Metropolitan bank, BDO, RCBC, BPI etc. Next are savings banks or also known as savings and

loan institutions and thrift banks. Like commercial banks, they also accept deposits but

narrower focus on residential mortgages. Third, rural banks have smaller assets than a large

bank. It is located generally in smaller cities and concentrates in making loans and other

services to that immediate location. Examples of these are Green Bank (Rural Green Bank of

Caraga), INC. They serve the financial needs of people in Nasipit. Lastly, universal banks are a

combination of three main services of banking: retail banking, wholesale banking and

investment banking. Retail banking only focuses on small and medium enterprises and of

course some of the loans and mortgages. Wholesale banking involves borrowing and lending

money on a very large scale. It includes pension funds, giant companies like SM (shopping

mall, real estate, etc.), they also include government and other financial institutions catering to

a big kind of companies. Lastly, the investment bank that focuses on service for major investors

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

and companies. They specialize in investment of pension funds like the GSIS and SSS money

goes through UNION bank or Metropolitan bank then to pensioners.

GOVERNMENT NON-BANK FINANCE

There are multiple government non-bank institutions. First is the SSS or Social Security

System that provides benefits to workers/employees in the private sector. In the long run this

SSS will provide pension for the worker. Second is PAG-IBIG, a home development mutual

fund, they are responsible for administration of the national saving program and affordable

shelter. Third is PHILHEALTH, a health insurance corporation that is attached to the

department of health. Last is GSIS, a life insurance coverage and benefits to government

employees. These government non-bank financial institutions are not accepting deposits but

they are accepting contributions: employee contributions, employer contributions, and

investment earnings.

PRIVATE NON-BANK FINANCE

For private non-bank, we have an Insurance Company also called Risk Pooling

Institution, an underwrite economic risk associated with death, illness, damage or loss of

property and other risk of loss. They provide a contingent promise of economic protection in

case of loss. There are two main types of insurance. First, we have Life insurance, an

insurance against economic loss of the insured premature death. Example of a life insurance

company is Sun Life Financial. Second is General insurance that also has two types market

and social insurance; Social insurance is against risk of loss of income due to sudden

unemployment, disability, illness and natural disaster while Market insurance is a privatized

insurance for damage or loss of property examples of this are theft, fire, damage, natural

disaster etc. In Private Non-bank we also Lending investors that operate as money brokers,

Pawnshops that offer secured loans to people, with items of personal property used as

collateral, and Remittance centers a non-commercial transfer of money by a foreign worker, a

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

member of a diaspora community, or a citizen with familial ties abroad, for household income in

their home country or homeland.

INSURANCE

Do you know when you will die? Or do you even know when you could have an

accident? For sure most, or all of you will say no. Though humans are smart, we all have our

limitations. This is why insurance or having insurance is important. Insurance makes us SURE

that whatever may happen, our future, or the future of our family will be in safe hands. But what

is insurance? Insurance is a contract or policy in which an insurer compensates someone for

their loss or harm. How does it work? The insurance company will make different insurance

policies or plans that are mostly related to death, illness, accidents, and calamity. In exchange,

the beneficiaries will pay for an insurance premium or the actual cost of the insurance policy.

Since insurance companies make different insurance plans, there are different types of

insurance. The common and most used types of insurance are Life insurance, Health

insurance, Long-Term Disability Coverage, Automobile Insurance, Educational Insurance, and

Property Insurance.

LIFE INSURANCE

Life Insurance is a policy that can be used to help pay for final expenses after you pass

away. This may include funeral or cremation costs, medical bills not covered by health

insurance, estate settlement costs and other unpaid obligations. For example, you died

unexpectedly or due to an illness, and your family don’t have the capacity to pay for your

hospital bills, for the place where you’ll be buried, or for your casket or coffin or urn jar if you’ll

be cremated. Your life insurance will help them to cover the payments for your death. It can be

also used to pay the hospital expenses that are not covered by your health insurance.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

HEALTH INSURANCE

Health insurance is a type of insurance that covers medical expenses that arise due to

an illness. These expenses could be related to hospitalization costs, cost of medicines or

doctor consultation fees. There are two common types of health insurance. First is Mediclaim

plans or also known as hospitalization plans. This is the most basic type of health insurance.

Most of these plans cover the entire family up to a certain limit. Last is Critical Illness Insurance

Plans that cover specific life-threatening diseases. The diseases it covers have prolonged

treatment and change in lifestyle like cancer, tumor, blindness, chronic lung disease, and more.

This plan helps to pay for bills and medicine, it is also a substitute income if you are not able to

work.

LONG-TERM DISABILITY COVERAGE

Long-term disability insurance is an insurance policy that provides income replacement

for workers if they become unable to work due to an illness or injury so they can continue

paying bills and meeting financial goals and obligations. While short-term disability insurance

usually lasts a maximum of two years, long-term coverage can often last five or 10 years, if not

all the way through to your retirement.

Long-term disability insurance usually costs 1%-3% of your salary. Benefits are usually

about 60% of your gross income, and can last anywhere from 2 years until retirement age,

depending on the terms of your policy.

AUTOMOBILE INSURANCE

Automobile or Car Insurance is designed to cover the costs involved with certain events.

Depending on what's included in your policy, you can be covered to repair damage to your car

after an accident, damage to other people's cars and property, the cost to replace your car after

it's stolen, and more.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

There are two common types of automobile insurance. First is Comprehensive Car

insurance that covers the damage to your car and other people’s cars and property. Last is

Third Party Car Insurance that only covers damage you cause to other people’s cars and

property.

EDUCATIONAL INSURANCE

Death is something that we cannot avoid, that is why it is important that we are

prepared that even if we die, our children will never suffer, especially when it comes to

education. Education is something hard to fulfill if a child doesn’t have any means. Education

Insurance or Child Education Insurance Policy is an insurance coverage plan specially

designed for a saving tool to provide an amount of education cost when your kids reach 18

years or above to enter into college. The purpose of this is to successfully finish your child’s

academic study. The plan has been purchased to assure students' financial security.

PROPERTY INSURANCE

Property insurance provides financial reimbursement to the owner or renter of a

structure and its contents in case there is damage or theft—and to a person other than the

owner or renter if that person is injured on the property.

There are two coverage types of property insurance. First is property which benefits

only you. This also includes home insurance, travel insurance, marine insurance, aviation

insurance, railway insurance, industrial insurance, and agricultural insurance. Most of these are

damage within the place, loss of luggage, in case of occurrence of accident, cargo insurance,

and more. Second is public property which also covers third party property damage. It is often

prepared for various professional groups, such as doctors, lawyers, investment advisors,

entrepreneurs and natural persons.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

PENSION FUNDS

Pension Funds are a type of retirement plan where an employee adds money into a

fund that includes contributions by the employer. The worker's pension payments are

determined by the length of the employee's working years and the annual income they earned

on the job leading up to retirement.

There are two distinct types of Pension funds. First is a private pension - also called a

personal pension - is a product that you can use to save money for retirement. These are

usually defined contribution pensions, which means the money you receive at retirement is

based on the money you've paid in and the performance of your investments. Second and last

is public pension funds for retirement savings of people who work for a government employer

or in the public sector. The public pensions come from three sources: employee contributions,

employer contributions, and investment earnings.

DEFINED-BENEFIT PENSION FUNDS

Defined-benefit plans provide eligible employees guaranteed income for life when they

retire. Employers guarantee a specific retirement benefit amount for each participant that is

based on factors such as the employee’s salary and years of service. Employees have little

control over the funds until they are received in retirement. The company takes responsibility

for the investment and for its distribution to the retired employee. That means the employer

bears the risk that the returns on the investment will not cover the defined-benefit amount due

to a retired employee.

THREE METHODS FOR CALCULATING PENSION

Flat benefit formula pays a flat amount for every year of employment

Example: an employee with 20 years of service at a company is considering retirement

at some point in the next 10 years. The employer uses a flat benefit formula by which the

employee receives an annual benefit payment of $2000 times the number of years of service.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

For retirement now, in 5 years and in 10 years, the employee’s annual retirement benefit

payment is:

Retire now $2000 x 20 = $40,000

Retire after 5 years $2000 x 25 = $50,000

Retire after 10 years $2000 x 30 = $60,000

Career average formula pension fund that pays retirement benefits based on the

employee’s average salary over the entire period of employment

Example: an employee with 20 years of service at a company is considering retirement

some times in the next 10 year. The employer uses a career average benefit formula by which

the employee receives an annual benefit payment of 4 percent of his career average salary

time the number of years of service. For retirement now, in 5 years and in 10 years, the

employee’s annual retirement benefit payment is:

Average salary Retirement benefit

1. Retire now $48,000 $48,000 x .04 x 20 = $38,400

2. Retire in 5 years $50,000 $50,000 x .04 x 25 = $50,000

3. Retire in 10 years $52,000 $52,000 x .04 x 30 = $63,000

Final pay formula pays a retirement benefit based on percentage of the average salary

during a specified number of years at the end of the employee’s career times the number of

years of services.

Example: an employee with 20 years of service at a company is considering retirement

at some times in the next 10 years. The employer uses a final pay benefit formula by which the

employee receives an annual benefit payment of 2.5 percent of her average salary during her

last five years of service times her total years employed. For retirement now, in 5 years and in

10 years, the employee’s (estimated) annual retirement benefit payment is:

Average salary Retirement benefit

1. Retire now $75,000 $75,000 x .025 x 20 = $37,500

2. Retire in 5 yrs $80,000 $80,000 x .025 x 25 = $50,000

3. Retire in 10 yrs $85,000 $85,000 x .025 x 25 = $63,750

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

DEFINED-CONTRIBUTION PENSION FUNDS

Defined-contribution plans are funded primarily by the employee. But many employers

make matching contributions to a certain amount. The most common type of defined-

contribution plan is a 401(k). Participants can elect to defer a portion of their gross salary via a

pre-tax payroll deduction to the plan, and the company may match the contribution if it chooses,

up to a limit it sets. As the employer has no obligation toward the account’s performance after

the funds are deposited, these plans require little work, are low risk to the employer, and cost

less to administer. The employee is responsible for making the contributions and choosing

investments offered by the plan.

FINANCIAL COMPANIES

Finance company specialized financial institution that supplies credit for the purchase of

consumer goods and services by purchasing the time-sales contracts of merchants or by

granting small loans directly to consumers. Finance companies make a profit from the interest

rates (the fees charged for the use of borrowed money) they charge on their loans, which are

normally higher than the interest rates that banks charge their clients.

Although they existed in the early 1900s, their greatest development came after World

War II. Large-sales finance companies, which operate by purchasing unpaid customer

accounts at a discount from merchants and collecting payments due from consumers, were a

response to the need for installment financing for the purchase of automobiles in the early

1900s. Ally Financial, for example, was established as the General Motors Acceptance

Corporation (GMAC) in 1919 to purchase automobile accounts receivable from car dealers who

were themselves unable to finance time purchases.

Do you know the difference between a finance company and a bank? First, some

finance company loans are similar to commercial bank loans, but others are aimed at relatively

specialized areas such as high risk (low credit quality) loans to business and consumers.

Second, unlike banks and thrifts, finance companies do not and cannot accept deposits.

Instead, they rely on short and long-term debt for funding. Lastly, because there are no

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

deposits at risk, finance companies are less regulated than banks and thrifts. They are subject,

however, to consumer regulations that limit interest rates and require disclosure of the cost of

loans.

TWO PURPOSE OF FINANCE COMPANIES

There are two purposes of finance companies: First, finance companies are money

market intermediaries which means that finance companies sell short-term securities in the

money markets and use the proceeds to make small consumer and business loans. In this way,

they act as intermediaries in the money markets. They typically borrow in large amounts and

lend in small amounts.

Second, finance companies exist to service both individuals and businesses. Consumer

finance companies that focus on loans to individuals differ from banks in significant ways. First,

consumer finance companies often accept loans with much higher risk than banks. These high-

risk customers may not have any source of loans other than the consumer finance company.

Second, consumer finance companies are often wholly owned by a manufacturer who uses the

company to make loans to consumers interested in purchasing the manufacturer’s products.

For example, all U.S. automobile companies own consumer finance companies that fund auto

loans. Often these loans are made on very favorable terms to encourage product sales.

Business finance companies exist to fill financing needs not served by banks, such as

lease financing. Manufacturers of business products often own finance companies for the same

reasons as automobile companies: Sales can be increased if attractive financing terms are

available. Some large companies own finance companies that provide clients with loans to

purchase goods from the large company. Under this arrangement the large entity is called the

parent company, and the smaller entity is called a subsidiary, or a captive finance company.

For example, many people who purchase vehicles from The Ford Motor Company obtain their

loans from Ford Motor Credit Company (FMCC).

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

RISK IN FINANCE COMPANIES

Default risk is the chance that customers will fail to repay their loans. As mentioned

earlier, many consumer finance companies lend to borrowers who are unable to obtain credit

from other sources. Naturally, these borrowers tend to default more frequently. The

delinquency rates for these finance companies are usually higher than those for banks or

thrifts. They recoup the losses they suffer from bad loans by charging higher interest rates,

often as much as twice that charged by banks. When economic conditions deteriorate, finance

company customers are often the first to be unemployed, and defaults cause losses.

Liquidity risk refers to problems that arise when a firm runs short of cash. Finance

companies run the risk of liquidity problems because their assets, consumer and business

loans, are not easily sold in the secondary financial markets. Thus, if they are in need of cash,

they must borrow. For example, a bank may have a liquidity problem if many depositors

withdraw their funds at once. Finance companies run the risk of liquidity problems because

their assets, consumer and business loans, are not easily sold in the secondary financial

markets. Thus, if they are in need of cash, they must borrow. This is not difficult for larger

finance companies because they have access to the money markets and can sell commercial

paper, but borrowing may be more difficult for smaller firms. Offsetting the lack of a secondary

market for finance company assets is the fact that none of the firm’s funds come from deposits,

so unexpected withdrawals do not occur.

THREE TYPES OF FINANCE COMPANIES

Finance companies have three types. These are Business (Commercial) Finance

Companies, Consumer Finance Companies and Sales Finance Companies.

Business (Commercial) Finance Companies are finance accounts receivable (often

through an arrangement called factoring) and provide inventory loans and leases. They make

loans to small and large businesses, often to help them cover costs for new equipment.

Finance companies gained the reputation of being more innovative than banks at finding ways

to finance small businesses. One reason they could be more flexible was their near-total

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

absence of regulation. Because there are no depositors to protect, the government has never

found the need to restrict the activities of these types of firms.

Business finance companies provide specialized forms of credit to businesses by

making loans and purchasing accounts receivable at a discount; this provision of credit is called

factoring. Business finance companies also specialize in leasing equipment (such as railroad

cars, jet planes, and computers), which they purchase and then lease to businesses for a set

number of years. One advantage of leasing is that repossession of the asset is easier.

Repossession occurs when the finance company takes the asset back when the lessee (the

firm that is leasing the asset) fails to make the payments on time.

Floor plan financing is most common in the auto industry because cars have titles that

the finance company can hold to secure its loans. In a floor plan arrangement, the finance

company pays for the car dealership’s inventory of cars received from the manufacturer and

puts a lien on each car on the showroom floor. When a car is sold, the dealer must pay off the

debt owed on that car before the finance company will provide a clear title of ownership. The

dealer must pay the finance company interest on the floor loans until the inventory has been

sold.

Consumer Finance Companies make small loans against personal assets and provide

an option for individuals with poor credit ratings. It provides small businesses with loans for

inventory and equipment purchases and are a good resource of capital for manufacturing

enterprises. Many finance companies lend to clients who cannot obtain loans from banks

because of a poor credit history (the record of an individual’s payments to the institutions who

have loaned him money in the past). Such clients secure their loans with finance companies by

offering collateral. According to Corporate Finance Institute, collateral is an asset that the

borrower offers to the lender to secure a loan. If the loan isn't repaid, the collateral becomes the

property of the lender.

Sales Finance Companies or also called captive finance company make loans to

consumers to purchase items from a particular retailer or manufacturer. It is owned by the

manufacturer to make loans to consumers to help finance the purchase of the manufacturer’s

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

products. These captive finance companies often offer interest rates below those of banks and

other finance companies to increase sales. Profits made on the sale offset any losses made on

the loans.

MUTUAL FUNDS

A mutual fund is a type of financial vehicle made up of a pool of money collected from

many investors to invest in securities like stocks, bonds, money market instruments, and other

assets. Mutual funds are operated by professional money manager, who allocate the fund's

assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's

portfolio is structured and maintained to match the investment objectives stated in its

prospectus.

Each investor of the fund becomes a shareholder or part-owner of the fund, and

receives a number of shares depending on the NAVPS (Net Asset Value Per Share) upon

purchase, plus the front-end fees applied. All the mutual funds in the Philippines are registered

with the Securities and Exchange Commission. These funds operate under the provisions of

strict regulation and auditing created to protect the interests of the investors.

You can earn a profit from mutual funds in the Philippines in three ways—dividends, capital

gains, and increased net asset value (NAV).

Dividends

A mutual fund can earn profits from dividends on stock or interest in assets. The mutual fund

company will then pay you most of the income, minus the expenses incurred by the company.

You can receive payment via check or choose to reinvest the profit to purchase more shares.

Capital Gains

When a fund sells securities that have increased in value, the fund will earn a capital gain. At

the end of the year, the mutual funds company will then distribute these gains, minus any

capital losses, to their investors.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

Increased Net Asset Value

Net asset value or NAV represents a funds per unit market value. If the market value of the

fund’s portfolio rises, then the value of the fund and its shares also increase. The higher the

NAV, the higher your investment’s value is.

Take note that your potential earnings are subject to fees and other charges as stated in your

chosen mutual funds company’s terms and conditions.

TYPES OF MUTUAL FUNDS

MONEY MARKET FUNDS

Money market fund is a type of fund that invests in short-term debt securities such as

time deposits, corporate bonds, money market placements, and cash assets. Money Market

Funds present the least risk among all types of funds, however, generates the lowest possible

return. This fund is suitable for investors with low risk tolerance and short-term investment

horizon, usually less than one year. Recommended for investors who may need their fund in a

short period of time yet seek safer and more stable investment vehicles and still earn better

than traditional bank products.

Top Performing Money Market Funds in the Philippines – October 31, 2021 Trading

Company Name NAV per Share Year to Date Return

ALFM Money Market Fund, Inc

PHP 130.89 0.82%

First Metro Save & Learn Balanced

PHP 2.6759 1.87%
Fund, Inc.

Sun Life Prosperity Peso Starter

PHP 1.3122 1.18%
Fund, Inc.

Sun Life Prosperity Dollar Starter

USD 1.06 0.59%
Fund, Inc.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

BOND FUNDS

Bond fund is a type of pooled fund is invested diversified portfolio of fixed-income

instruments, such as government securities, treasury bills, commercial papers, treasury notes

and others. Bond Funds earn through the interests paid regularly. The return of investment in

bond funds usually outperforms the interest rates of bank deposits and deposit substitute

instruments. Can be a good guard against inflation and it preserves the money value for short-

term. This can be used for those conservative investors who do not want to risk their money in

market volatility, thus opting a safer investment instrument, yet protecting it against the effects

of inflation. The recommended time horizon for this type of fund is one to three years.

STOCK FUNDS

Stock fund is a type of fund is invested in a diversified portfolio stocks/ equity and generally

has the highest return on investment in the long-term. Stock funds designed to earn from

capital gains and dividend yields. Those investors who seek maximum capital appreciation may

opt for this kind of fund given that they can take the high risk of volatility. The recommended

length of stay is five years and beyond. This is usually recommended for those investors who

have long-term financial goals with five years and beyond time horizon such as children’s

education, retirement fund, funds for future business, and others.

BALANCED FUNDS

Balanced fund is a type of fund is a hybrid fund, a mix of a stock fund, bond fund or money

market fund in a single portfolio. This type of fund is poised to gain moderate return on

investment without exposing the fund to too much risk or volatility. Usually there are set gauges

on how much a balanced fund invested in stocks and bonds. This is recommended for

investors with a moderate risk appetite — that is they are willing to expose their investment in

volatility yet they have some cover in case something happens to the market. The usual time

horizon for balanced funds is around three to five years.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

Top Performing Balanced Funds in the Philippines in Peso Securities

Company Name NAV per Share Year to Date Return

ATRAM Dynamic Allocation PHP 1.6858 1.03%

Fund, Inc.

ATRAM Phil. Balanced PHP 2.2319 -2.34%

Fund, Inc.

First Metro Save & Learn PHP 2.6759 1.87%

Balanced Fund, Inc.

First Metro Save and Learn PHP 0.1994 0.66%

F.O.C.C.U.S. Dynamic Fund,

Inc. (a)

NCM Mutual Funds of the PHP 1.9919 1.26%

Phils., Inc.

PAMI Horizon Fund, Inc. PHP 3.719 -1.87%

ADVANTAGES OF MUTUAL FUNDS

Diversification

There is a saying that goes, “Do not put all your eggs in one basket.” This adage is

especially true in the world of investments which is full of uncertainties. There is no such thing

as a “sure “thing. An important investment principle that requires holding several securities to

reduce the risks associated with investing in individual securities is called diversification. When

people invest in a mutual fund, they achieve instant diversification because the fund is usually

invested in a wide array of securities.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

Professional Management

One of the main attractions of mutual funds is that it affords its investors, particularly the

small ones, the services of full-time professional managers whose job is to analyze the various

investment products available in the market and select those that would give the best possible

returns to the fund and its shareholders.

Low Capital Requirement

Direct investments usually require substantial capital. The minimum investment amounts

for Treasury Bills and commercial paper, for instance, range from Php100,000 to Php1 million

depending on the bank or investment house you are dealing with. This also holds true for

stocks because while an investor may be able to buy one “lot” (shares are sold in board lots of

10 to 1 million shares depending on the price at which these shares are traded) for as low as

Php1,000 to Php5,000, he may not find a stockbroker who will service his account because

they prefer to deal with high net worth individuals (rich people in layman's terms) or at least with

people who have substantially more than just Php5,000.00 to invest. In contrast, most mutual

funds in the Philippines require a minimum initial investment amount of only Php5,000.00 and

minimum additional investments of Php1,000.00.

Liquidity

Liquidity is the ability to readily convert investments into cash. Other investment products

require investors to find a buyer so that he can liquidate his investment. That is not the case

with mutual fund shares because the fund itself stands ready to buy back these shares at the

prevailing Net Asset Value Per Share. While the law provides that redemption proceeds must

be given within seven (7) banking days from the date of the redemption request, most funds are

able to pay the redemption proceeds within a day. Mutual funds are, therefore, considered very

liquid investments.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

Safety

Safety is a very important consideration for most investors. Sometimes even more

important than potential returns. Nevertheless, mutual funds are highly regulated by the

Securities and Exchange Commission under the Investment Company Act (Republic Act 2629)

and its implementing rules. They are prohibited from investing in particular investment products

and engaging in certain transactions. They also have to submit regular reports to the SEC as

well as to their shareholders. As mentioned earlier, all of the fund's assets must be held by a

custodian bank for a safekeeping.

Convenience

In other countries, mutual funds can be purchased directly from a funds or through a

broker, financial planner, bank or insurance agent, by mail, over the phone and increasingly

over the internet. The popularity of mutual funds in the Philippines is fast catching up. It may

be a matter of time for this level of convenience to be a reality in the country. Funds also offer

a variety of other services, including monthly or quarterly account statements, tax information,

and 24-hour phone and computer access to fund and account information.

DISADVANTAGES OF MUTUAL FUNDS

Fees and Charges

Because someone else is managing the fund for you, you’ll incur some fees and charges

no matter how the fund performs. You may have to pay an annual fee for fund management,

usually based on a small percentage of your shares’ total value.

Less Control Over Your Portfolio

When you invest in mutual funds in the Philippines, you pass on all control to a

professional fund manager who makes all investment decisions for you. You can’t step in to

make strategies for the fund.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

Potential Risks

For conservative investors, mutual funds may not be the right fit. Low-risk mutual fund

investments only have minimum returns. Mutual funds also don’t come with guaranteed returns.

How to Invest in Mutual Funds in the Philippines?

Evaluate Your Goals

Before deciding to invest in mutual funds, analyze what your financial goals are. Ask

yourself why you want to start mutual fund investing. What’s your risk appetite? How much

money are you willing to invest? This will help you evaluate whether mutual funds are the best

investment vehicle for you or not.

Choose the Right Company That Fits Your Needs

Once you’re sure that mutual funds are the way to go, research about mutual fund

companies in the Philippines. Make sure these companies are regulated by the SEC. Several

companies tied to banks and insurance firms can help you get started in mutual funds. You can

visit them in person to inquire about investment opportunities or explore their websites and

compare their offerings against each other.

You can also visit the Philippine Investment Funds Association (PIFA) website to find

the best company to invest in based on its NAVPS performance. NAVPS stands for Net Asset

Value Per Share that represents a mutual fund’s price per share.

Talk to Your Agent

When you’ve finally chosen the best company that will manage your investment, an

agent will be assigned to answer your questions. List down all your questions before meeting

with the agent so that you won’t forget them. The agent will also help you find the best type of

mutual fund for your needs. He or she will be there to guide you from investing to monitoring

your investment.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

Pick the Best Type of Mutual Fund for You

The next step is choosing the kind of mutual fund you would like to invest in. Consider

your financial goal, risk appetite, and preferred investment time frame when picking one.

Several different accounts are available locally and carry various kinds of risks and returns.

Submit the Requirements

Answer the Investor Profile Questionnaire, which will help determine what kind of

investor you are and your risk tolerance. You’ll need to fill up a personal information sheet and

submit valid IDs. Also, you’ll fill up an Order Ticket to determine how many shares you plan to

purchase.

Track Your Investment

Once you’re all set, make sure to monitor your investment. Talk to your fund manager to

get updates about the performance of your share. Remember that payments for mutual funds

should only be done at the company’s office or at a partnered bank to avoid any issues.

Where to Invest in Mutual Funds in the Philippines?

Since investing in mutual funds in the Philippines will require you to have an investment

platform, we’ve listed a few options where you can put your hard-earned money.

Company Name Starting Investment Amount

First Metro Save & Learn Balanced PHP 5,000

Fund, Inc.

COL Financial PHP 1,000

Bonds.ph PHP 5,000

Seedbox PH PHP 1,000

GCash Invest Money PHP 50

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

GOVERNMENT FINANCIAL INTERMEDIATION

Government Financial Intermediation are government institutions that provide financial

services. Here in the Philippines, we have Government Service Insurance System, Social

Security System, Philippine Health Insurance Corporation, and Home Development Mutual

Fund.

1. Government Service Insurance System

The Government Service Insurance System or GSIS is a social insurance institution

created under Commonwealth Act No. 186 on November 14, 1936. It provides and administers

a pension fund to secure the future of all employees in the Philippine Government which has

the following social security benefits: Compulsory life insurance, Optional life insurance,

Retirement benefits, Disability benefits for work-related accidents and death benefits.

Republic Act 696 or The Property Insurance Law: the GSIS also manages the

General Insurance Fund for the comprehensive protection to government insurable interests

Property Insurance Law is the insurance that covers the risk of all the damages caused by fire,

theft, wind, lightning etc.

The membership in the GSIS shall be compulsory for all government employees

receiving compensation except: Those who reached retirement age, Contractual employees

who have no employee-employer relationship with their agencies, Uniformed members of the

Armed Forces of the Philippines and the Philippine National Police, including the Bureau of Jail

Management and Penology and the Bureau of Fire Protection.

The GSIS provides services not only to its members but also their dependents and

beneficiaries, the retirees and pensioners, and the survivors of deceased members or

pensioners.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

2. Social Security System

The Social Security System or SSS was created on September 1, 1958 by virtue of RA

1972 Section 2 of the SSS Law (Republic Act No. 1161) is a social insurance program that

aims to provide protection to its members and beneficiaries

SSS Act of 1997 or Republic Act. No. 8292: Is a policy of the State to establish,

develop, promote and perfect a sound and viable tax-exempt social security system suitable to

the needs of the people throughout the Philippines. It promotes social justice and provides

meaningful protection to members and their beneficiaries against the hazards of disability,

sickness, maternity, old age, death and other contingencies resulting in loss of income or

financial burden.

3. Philippine Health Insurance Corporation

The Philippine Health Insurance Corporation or PhilHealth is a government corporation

attached to the Department of Health. It was created in 1995 to create a universal health

coverage for the Philippines. It is a tax- exempt, government-owned and government-

controlled corporation (GOCC) of the Philippines.

It administers the National Health Insurance Program, which established to provide

health insurance coverage and ensure affordable, acceptable, available and accessible health

care services for all citizens of the Philippines

ARTICLE III, SECTION 5 OF REPUBLIC ACT 7875: AN ACT OF INSTITUTING A

NATIONAL HEALTH INSURANCE PROGRAM FOR ALL FILIPINOS AND ESTABLISHING

THE PHILIPPINES HEALTH INSURANCE CORPORATION FOR THE PURPOSE.

a) provide all citizens of the Philippines with the mechanism to gain financial access to

health services;

b) create the National Health Insurance Program, hereinafter referred to as the

Program, to serve as the means to help the people pay for health care services;

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

c) prioritize and accelerate the provision of health services to all Filipinos, especially that

segment of the population who cannot afford such services;

d) establish the Philippine Health Insurance Corporation, hereinafter referred to as the

Corporation, that will administer the Program at central and local levels.

4. Home Development Mutual Fund

Home Development Mutual Fund, commonly known as Pag-IBIG, was created on June

11, 1978, is a government- owned and controlled corporation under the Department of Human

Settlements and Urban Development of the Philippines. It was established to provide a national

savings program and affordable house financing for Filipinos.

REPUBLIC ACT NO. 9679: AN ACT FURTHER STRENGTHENING THE HOME

DEVELOPMET MUTUAL FUND, AND FOR OTHER PURPOSES

This act shall be known as the “Hone Development Mutual Fund of 2009, otherwise

known as Pag-IBIG (Pagtutulungan sa kinabukasan: Ikaw, Bangko, Industriya at Gobyerno

Fund” It is the policy of the State to establish, develop, promote, and integrate a nationwide

sound and viable tax- exempt mutual provident savings system suitable to the needs of the

employees and other earning and to motivate them to better plan and provide for their housing

needs.

The State shall integrate all laws relating to the Home Development Mutual Fund to effectively

achieve the ff objectives:

(a) To improve the quality of life of its citizen by providing them with sufficient shelter

(b) To provide for an integrated nationwide provident savings system

(c) To provide housing through mobilization of funds for stable finance

SECURITY MARKET OPERATIONS

SECURITY

When it is said securities, it will prove that you own a company or entity and it will

also prove that you have a liability or debt to a company or an entity. There are two examples

of securities:

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

Stocks

First let’s discuss stocks, stocks are shares of ownership in a corporation. When

we say shares, it means ownership interest of a shareholder to an entity. When you buy

shares, you will become a stockholder of that company. And if you become a shareholder,

you’ll be considered as part of the company. And the stock will be the proof that you are also

part of the said entity. Stocks and shares can be used vice versa but take note stocks and

shares still have differences.

For example,

1. I own shares of Jollibee

2. I own stocks.

On example number 1, there is a specific corporation or company that is mentioned

therefore the shares are used when you are referring to a specific company. Then on example

number 2, there is no specific corporation, company, or entity, therefore stocks are used when

you are referring to any entity. That is the difference between stocks and shares. But take note

that even though the two have differences they still can be used vice versa.

Bonds

Next are bonds. Bond is a contract of a debt whereby one party called the issuer

borrows funds from another party called the investor. A bond is a contract of debt, which means

when there are contracts involved it has two parties and they are called the issuer and investor.

The issuer is the borrower of the fund; the Investor is the lender, the one who will lend a

fund to the issuer. Between the issuer and the investor, the one who has liability is the issuer,

the issuer is the one who will issue a bond certificate. He is the one who has the responsibility.

He is the one that must issue a bond certificate to investors. And in exchange, the investor will

lend a fund to the issuer. Since the bond is a contract of debt, this is proof that there is

indebtedness in a company or an entity. The issuer has liability or debt to the investor. So

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

basically, stocks and bonds are examples of securities, why? Because securities are proof of

one’s ownership and indebtedness in a company or entity.

MARKET

Market is a mechanism that brings together buyers and sellers to aid in the transfer of

goods and services. In other words, when we say market, it is anywhere where the buyers and

sellers come together and transact with each other, so with the purpose of buying and selling,

goods and services

Take note that a market does not necessarily need a physical location. For example,

when the transaction is an online transaction, the buyer and seller can transact online without

the need for a physical location. Therefore, to a market, it doesn’t really matter or it is not

important if you have or have no physical location, what is important here is that the buyers and

sellers can transact with each other. What is important here is that the buyers and sellers can

still communicate the relevant details of the said transaction.

To be specific, what are the relevant details of a transaction? For example, the goods

being transacted. So that the buyer knows what he/she needs to buy and the seller must know

what he/she is selling. Basically, both seller and buyer must agree on certain goods. For

example, I am the buyer and Somel is the seller. We have a transaction, me as a buyer is

planning to buy cosmetics, but what Somel sells are clothes or any apparels, obviously the

transaction is impossible.

Another one is the quantity. They must know the number of goods that are available or

also what we call as stocks of product in their transaction, the number of products they will buy

and at the same time the number of products that the seller sells.

Another important detail is the price of the goods, since their purpose is to buy and

sell goods and services, they must know the price of what they will buy and what they will sell.

so here, you can see there is a meeting of minds, both seller and buyer must agree.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

TYPES OF MARKET

Markets are usually designated by the type of goods or services that it trades. Hence, a

foreign exchange market is where currencies are sold and bought, while a securities market is

where all forms of securities are traded. It means markets are classified depending on what

type of goods and services they offer.

For example, the food market. You all name it, what are the things you can see in a

food market? Obviously, foods such as meat, fish, fruits, vegetables, etc. are called food

markets because you can see and buy foods. In the foreign exchange market, currencies. In

the securities market, securities.

MONEY MARKET

The money market is the market for highly liquid, short-term fixed-income in such as

Treasury bills, commercial paper, and bank certificates of deposits. When we say short-term

the maturity is less than 1 year. When we say money market, it is designed for the making of

short-term loans. It is the institutions with temporary surpluses of funds that meet the need of

borrowers who have temporary fund shortages. Meaning to say institutions with excess funds,

they are the one that lends money to entities that have shortage of funds.

MONEY MARKET

The market for longer-term securities such as bonds, stocks and mutual funds. So, if

there is a money market that is for short-term Capital market is the opposite of that. If the

money market’s maturity is less than a year, in the Capital Market it is more than 1 year. Capital

Market is designed to finance long-term investments by businesses, governments, and

households. As you can see this is another difference. In the money market, they can only give

financial assistance to those under short term investments or those who have temporary

investments. But here in the Capital Market, it is designed to finance long-term investments.

Trading of funds in the capital markets makes possible the construction of factories, highways,

schools, and homes.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

STOCKS MARKET

The Stock market or stock exchange provides a safe and regulated environment in

which market participants can confidently trade shares and other qualified financial instruments

with little to no risk of losing money. The stock markets operate as primary and secondary

markets, according to the guidelines set forth by the regulator.

What is equity security? Equity Securities represent ownership shares. When it comes

to issuer and investor, to the issuer it is equity and to Investor, it is a financial asset.

Examples of equity securities are stock and warrants. Earlier, I already discussed

stocks. So now let’s move forward to warrant. A warrant is a security that grants the holder the

right but not the obligation to buy or sell a stated number of underlying shares of stock at a

specified price during a specified period of time. Like stocks, a warrant is also a security.

Meaning to say, when a warrant is bought by a person, or let’s just say a holder. The holder

has the right to sell or buy a share of stocks at a specified price during a specified period of

time, but the holder is not obliged to sell or buy that shares of stock. As a result, the holder is

not forced to sell or buy those shares of stock at a specified price during a specified period of

time. Remember that, the holder has the right but he has no obligation, and still, it is dependent

upon the holder of the warrant if that person wants to sell or buy the shares of stocks at a

specified price during a specified period of time.

BOND MARKET

A bond market is a marketplace for debt securities. This market covers both

government-issued and corporate-issued debt securities. It allows capital to be transferred from

savers or investors to issuers who want funds for projects or other operations.

when we say debt instruments, from Investor it is a financial asset while from Issuer, it is

a financial liability. The one who issued the security is the one who has a financial liability,

that’s why it is called debt instruments because what we’re looking for is Issuer’s POV. Unlike

in equity securities, on the part of the issuer, the equity securities are equity of an issuer.

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

DERIVATIVES MARKET

The market for derivatives or instruments whose value is derived from underlying

assets. Examples of derivatives are options and futures contracts.

When we say options, it gives the investor the right, but not the obligation to buy or sell

shares at a specific price at any time, as long as the contract is in effect. To make it clear,

Warrant and Options are different. Option is an agreement wherein the buyer possesses a right

but not the obligation, while in Warrant, a warrant is an instrument to provide the buyer the right

to get a specified number of shares at a specified price during a specified period of time.

When we say futures contracts, it requires the buyer to purchase shares and a seller to

sell them on a specific future date. Unless the holder’s position is closed before the expiration

date. The reason why it is called a futures contract is that it is named from the fact that the

buyer and seller of the contract are agreeing to a price today for some asset or security that is

to be delivered in the future.

Also, the reason why it is called derivatives, it is a financial instrument that derives its

value from the movement in commodity price, foreign exchange rate, and interest rate of an

underlying asset or financial instrument.

A derivative is an executory contract. It is not a transaction but an exchange of

promises about future action. Parties to the derivative financial instruments are taking bets on

what will happen to the underlying financial instrument in the future.

CHARACTERISTCS OF A GOOD MARKET

First, TRANSPARENT, one attribute of a good securities market is that there is equal

and fair access to information. Of course, it is not enough to just have equal and fair access.

The participants must have timely and accurate information. For example, the participants must

know the price of the securities from the previous transaction and also the price in the current

transaction

Second, LIQUID. Another feature of a good market is that the securities can be traded

quickly at a price close to the prices of the previous transaction. Meaning to say securities from

(046) 4150-010 / (046) 4150-011

 Republic of the Philippines
CAVITE STATE UNIVERSITY
Don Severino de las Alas Campus
Indang, Cavite
www.cvsu.edu.ph

said securities market is easy to buy and to sell. At the same time the price of today’s securities

is away from the previous transaction.

Third, INTERNALLY EFFICIENT. A good market should entail low transaction costs.

Example, the transferring of securities, the transferring of securities from seller to buyer the

transaction cost must be low.

Lastly, EXTERNALLY EFFICIENT. A good market is one where prices adjust quickly to

new information such that the prevailing price reflects all available information regarding the

security. Therefore, you can say that a securities market is externally efficient when the price

on the securities market is flexible.

(046) 4150-010 / (046) 4150-011