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Investment Guide
Financial planning is a process, a process
Van Joseph F. Capili, RFP where you stop working for every peso
Financial Consultant
and learn to start putting your money to
work for you.
Table of Contents

1 Introduction We always dream for our hard-earned

money to accelerate faster than the rate
2 Simplified Steps to we are spending. This is because we hope
Financial Planning
that someday our money can sustain for
4 Types of Risks in Investing itself, without us having to work hard
for it. How can we then accelerate our
5 Investment Instruments
5 Equity Investments
In kinematics, acceleration is the change
7 Government Securities
in velocity over time. In terms of
9 Professionally Managed investment, acceleration can be likened to
Funds the rate of return we get from investing.
There is definitely a greater chance for
9 Mutual Funds
our money to accelerate when we invest it
11 UITF rather than just saving it.

12 Variable Universal Life

While savings are generally held in the
13 Endowment Insurance short term, investments have a longer time
horizon. Just like a speeding car gaining
15 Pre-Need Plans
momentum, the highest returns can be
16 Real Estate achieved in the long-term when the speed
has become self-sustaining and the
17 Business
momentum picks up.


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
investments. Lastly, practice due diligence in evaluating players in the industry such as
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  Amount    Standard Expenses  Amount 
Salary, the client  600,000     Utilities: Cellular phone  42,000  
13th Month Pay  50,000                        Water  24,000  
                           Electricity  60,000  
Passive Income                          Telephone  36,000  
Rent from Townhouse  660,000     Transportation: Gas  120,000  
                           Insurance  15,000  
Total Annual Income  1,310,000                        Maintenance  15,000  
Total Annual Expenses  1,299,100                        Driver's Salary  48,000  
Disposable Income  10,900     Home: Groceries  144,000  
                           Household Supplies  60,000  
Annual Expense ‐ Income Ratio                       Maintenance  24,000  
Total Annual Expense  1,299,100.00     Educational Expenses: Son  40,000  
Total Annual Income  1,310,000.00                         Niece  40,000  
Expense Income Ratio  99.17%                        Brother  30,000  
                          Self  30,000  
      Pension Plan  168,000  
          Discretionary Expenses  Amount  
          Dining Out  96,000  
          Movies  48,000  
          Vacation  35,000  
          Clothing  60,000  
          Donations  2,500  
          Club Membership Fees  141,600  
          Gifts  20,000  
          Total Annual Expenses  1,299,100  


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
21 – 35 High Risk: Aggressive 10 - 30 years holding period Capital Appreciation; Long Term Growth Equities, Equity Funds
35 – 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.

Goal Amount Time Frame Commitment Investment Product

Purchase of a 30 sqm. Php 100,000 initial investment in Bond Fund & Mutual Fund with an
Down payment of
Condominium Unit at 5 years to go Php 5,000 subsequent monthly investments up to Average Return of 15% YTD
Php 500,000
Grand Soho Makati year 5 (based on historic returns)

Child’s Education at 10 years to go. Educational Plan with Dividends

1st year college tuition
Ateneo de Manila Your child is 7 Php 40,000 annual installment for 10 years Education Benefits of 600,000 for
of Php 150,000
University years old. 4-Year College Course (150k/yr.)

Total costs of Treasury Note with coupon payment

Wedding Expenses Php 200,000 investment in 3-year FXTN (fixed
Php 250,000 inclusive of 8% paid semi-annually
at San Agustin Church 3 years to go. exchange treasury note) with coupon payment of
of 2 days, 3 nights in Coupon rate depends on prevailing
+ honeymoon expenses 8%
Hong Kong interest rates.

Protection Needs
for my spouse & Php 3 million Indefinite time Php 67,410 annual premium investment for whole Investment-Linked Insurance with
dependent parents in protection needs frame. life insurance Face Amount of Php 3 million
case of emergencies

Php 420,000 in Savings Account Peso Savings @ 1.5% p.a.

Php 84,000 Annual Installment for Pension Pension Benefits of 1,000,000
Php 8.9 M-worth Rental Property Real Estate @ 7% p.a.
Php 209,000 Annual Premium in VUL Variable Universal Life Insurance
Retirement Funding Php 300 million 35 years to go Face Amount of Php 8,460,606
At Age 65 lump sum at age 65 till retirement. Bond Fund: initial Php 1M
subsequent 18,524/ month Peso Bond Fund
Balanced Fund: initial Php 1M Peso Balanced Fund
subsequent 39,428/ month Peso Equity Fund
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

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.



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:

100 shares x 34 per share = 3,400

Fees + 250
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 = 500

Total Additional Income = 500

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%.

100 shares x 45 per share = 4,500

Fees - 170
Total Cash Received = 4,330

Rate of Return = 4,330 – 3,650 = 680

3,650 3,650
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

charged usually at 0.25% (industry-wide).

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.



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

(100,000) 6,800 6,800 6,800 6,800 106,800
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)

2004 2005 2006 2007 2008 2009
8.5% 8.9% 9.1% 6.5% 8.4% 7.9%

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

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.


Source: Bureau of Treasury


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.

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.

Types of Funds:

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

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

This is invested mainly in long-term debt instruments and subject to

Bond Fund
interest rate risk.
This is invested in purely short-term debt instruments and yield relatively
Money Market Fund
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.


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.

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 = 98,500,691 = P 1.5572

Number of Shares Outstanding 63,253,611 63,253,611

No. of Shares Bought = Investment Amount = 100,000 = 64,217 shares

Current NAVPS 1.5572

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.

Feature Mutual Funds UITFs

Who is the issuer? Investment Company Trust Department of Banks
What instruments are issued? Common Shares Units of Participation
Do investors have shareholder rights? Yes No
What is the government regulatory agency? SEC BSP
Are assets to be held by an independent custodian? Yes Yes
Are they subject to full disclosure requirements? Yes No
Are they subject to reserve requirements? No No

C. Variable Universal Life Insurance (VUL)

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 MUTUAL 
and the wealth potential of mutual funds. Furthermore, it grants the investor the FUND 
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.


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.

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.


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.

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?


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.

Modal Initial
Installment Installment 10 Years to Pay, 10 Years to Mature
Annual Payment per Plan 34,300.00 34,700.00 Initial Education Benefit: 50,000
Term Insurance (10; 343000) 1,029.00 1,029.00 Gross Contract Price: 343,000
Accidental Death (10; 343000) 377.30 377.30 Total Education Benefit: 611,400

Total Annual Installment 35,706.30 36,106.30

Total Semi-Annual Installment 18,924.34 19,324.34
Total Quarterly Installment 9,819.24 10,219.24
Total Monthly Installment 3,392.11 3,792.11



Age Illustrative Guaranteed Illustrative Guaranteed
Anniversary Annual Rider Return of
of Accumulated Termination Total Surrender Education
Date Installment Amount GCP
Scholar Dividends Value Benefit Benefit
Nov, 2008 7 34,300.00 1,406.30
Nov, 2009 8 34,300.00 1,406.30 155 - 155
Nov, 2010 9 34,300.00 1,406.30 650 13,720.00 14,370
Nov, 2011 10 34,300.00 1,406.30 1,537 20,580.00 22,117
Nov, 2012 11 34,300.00 1,406.30 2,867 41,160.00 44,027
Nov, 2013 12 34,300.00 1,406.30 4,656 51,450.00 56,106
Nov, 2014 13 34,300.00 1,406.30 6,966 82,320.00 89,286
Nov, 2015 14 34,300.00 1,406.30 9,857 96,040.00 105,897
Nov, 2016 15 34,300.00 1,406.30 13,402 137,200.00 150,602
Nov, 2017 16 34,300.00 1,406.30 17,670 154,350.00 172,020
Nov, 2018 17 - 22,750 * 375,314.00 * 398,064 50,000.00
Nov, 2019 18 - 60,000.00
Nov, 2020 19 - 72,000.00
Nov, 2021 20 - 86,400.00
Nov, 2022 21 -
Nov, 2023 22 -
Nov, 2024 23 -
Nov, 2025 24 - 171,500.00
Nov, 2026 25 -
Nov, 2027 26 171,500.00
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 Total Cash Outlay: Php 473,576.40
Maturity Benefit: Php 1,000,000 @ age of 57 Absolute Return: Php 526,423.60
Annual Installment: Php 47,318/year Rate of Return: 3.71% p.a.


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.

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 19th 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 & 1st 6 months of 2009 (20% x 2.3 M) = 460,000/18 months = 25,556 /per month
Last 6 months of 2009 (80% x 2.3 M) = 1,840,000/54 months = 34,074 + interest/ per month
2010 (80% x 2.3 M) = 1,840,000/54 months = 34,074 + interest/ per month
2011 (80% x 2.3 M) = 1,840,000/54 months = 34,074 + interest/ per month
2012 (80% x 2.3 M) = 1,840,000/54 months = 34,074 + interest/ per month
2013 (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) Profit/Gain

25,556 40,000 14,444
34,074 ++ interest 40,000 At Most 5,926
34,074 ++ interest 40,000 At Most 5,926
34,074 ++ interest 40,000 At Most 5,926
34,074 ++ interest 40,000 At Most 5,926
34,074 ++ interest 40,000 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%

25,556 25,556

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.


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 = INFINITY


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.”


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