Mutual Funds

Chapter 1

INTRODUCTION

RATIONALE OF THE STUDY

Financial investments are an important part of building wealth because of several benefits. They help people beat inflation, save for retirement, put money to work and serve as financial resources for business (Joseph, n.d.).

A financial investment that is popular among minor investors in foreign countries is the mutual fund because it paves the way for this type of investor to enter the stock market. Moreover, they offer several advantages: professional fund management, diversification (Tiongson, 2012) and more affordability compared to investing directly in the stock market.

However, despite the availability of this very accessible financial investment, a large portion of Filipinos still opts to spend their money instead of saving and investing. The savings rate in the Philippines is approximately at 12 to 13 percent, whereas the savings rate in neighboring countries like Hong Kong, Indonesia, Malaysia and Thailand are about 30 to 40 percent (Tiongson, 2011).

Of those who do save, only a few ever invest in mutual funds, as shown in the Philippines’ low collective investment schemes against their total deposits. Filipinos invest only 5 percent out of their total deposits (Pasuelo, 2012). Neighboring countries like Singapore and Malaysia are reported to invest at 7% and 21% of their total deposits respectively (Pasuelo, 2012). In more mature markets like the US and Hong Kong, they invest at more than 100% of their total deposit.

This may be due to low financial literacy rates in the Philippines as there are only a few tools designed to help improve the financial literacy in the country (Sun Life steps up, 2013). In a nationwide study conducted by Sun Life of Canada (Philippines), Inc. (as cited in Sun Life steps up, 2013), only 8% of the 1,100 respondents scored higher than 80% in the study’s financial literacy quiz.

Hence, there is a need to study financial investments like mutual funds to enhance knowledge in the field through providing empirical analysis on the risk and return of mutual funds. This, in turn, can potentially improve financial literacy in the Philippines as more knowledge can encourage Filipinos in investing.

THE PROBLEM

STATEMENT OF THE PROBLEM

        The research aims to analyze the risk and return of selected mutual funds offered by SunLife Financials in order to suggest investment guidelines for beginner investors.

        Specifically, the study intends to answer the following research questions:

1. What are the profiles of the selected mutual funds in terms of:

1. the fund’s investment policy/strategy;
2. years of operation;
3. minimum investment requirements and costs/fees;
4. portfolio composition?

1. What are the average rates of returns for 5 years?
2. How risky are the mutual funds over time in terms of:

1. The fund’s volatility of returns through standard deviation;
2. The fund’s risk-return trade-off through coefficient of variation?

1. Overall, which investment company outperforms others in terms of risk and returns?
2. Based on the findings of the study, what guidelines can be suggested for beginners as they invest in these types of mutual funds?

SIGNIFICANCE OF THE STUDY

This study will help improve the finance discipline through enriching the knowledge on the risk and return of mutual funds, particularly in the Philippines.

Beginner Investors

Beginner investors, particularly the young ones, will be guided in their investment decisions as this study will be providing suggestions on investing in mutual funds. They will also be given an overview about what these mutual funds are, and the risks and returns they can expect from the fund.