Investing in Rural Banks — Risky?

 

Any form of investment has inherent risks involved. As investors, you have to conduct your due diligence before jumping into something. Never ever give your hard-earned money to some investment scheme you dont fully understand.

Recently, Rural Banks offering high interest rates for their Time Deposit products have experienced some setbacks. We saw how G7 Rural Bank went belly-up, one of the biggest and trusted rural banks, a few weeks back.

To know more about it.. follow this Forum Thread

And now, rumors are hounding investors of the Legacy Banks, with issues of solvency and integrity.

To know more about it.. read this article from Inquireror follow this Forum Thread for recent updates.

As simple investors, we probably won’t know the real deal, until all the dust settles. But, if you have done your assigment before placing any investment, and you have understood all the risks involved — then, there’s no need to worry. Besides, PDIC will always be there to insure your money.

So, is it Risky? If you just followed the herd and didn’t do any research — yes, it’s Risky. But, if you have considered all the elements — like bank history, reasonable interest rate for your investment, and PDIC limit — then, the Risk is minimized or even close to Nil.

INVESTING

After saving for your Emergency Fund, any other excess funds should be invested. Most Filipinos, being conservative in nature, keep their excess funds in the Bank (normally in a savings or time deposit accounts). But by doing so, you lose the value of your money and gets gobbled up by Inflation, which is currently at 9%.

 

To ensure you keep the value of your money, and potentially increase its future value, one needs to explore all investing options.

 

As discussed in my previous post, you can either be an ACTIVE Investor or PASSIVE Investor. The former requires you to devote much of your time managing it – such as engaging in business or active trading. On the other hand, the latter requires you very minimal time to monitor your investment, and allows other people (experts) to manage your money. This is very typical for people with a regular job, and has excess funds to invest.

 

PASSIVE INVESTMENTS

 

1.                    Mutual Funds  – this is a managed pool of fund invested mostly in equities/stocks, treasury bills, bonds, commercial securities, etc. Depending on the type of fund, you would expect variations in terms of potential returns.

a.  Stocks Funds – high risk, high returns

b.  Balanced Funds – mid risk, mid returns

c.  Bond or Money Market Funds – low risk, low returns

 

To know more about Mutual Funds, I suggest you check these websites:

                http://www.icap.com.ph/index.asp

                http://www.philequity.net/

 

You will find many funds available in the market, but my personal preference is Philequity.

 

2.                    Stocks – you buy stocks of publicly traded companies (http://www.pse.org.ph). Either you seek the assistance of a personal broker, or open an online account. The former may require you to maintain a portfolio with high amount, and at the same time pay very expensive commission to your broker. The latter on the other hand allows you to manage your own portfolio, pay cheaper commission, and open an account with just Php25K.

 

You can check this website for more details,

 

Citiseconline

I personally trade using citiseconline’s platform.

 

I suggest, to gain more confidence, as you will be managing your own account, start playing with virtual trading accounts first –

 

Virtual Tycoon (by Citiseconline)

 

My personal view, pick companies which will stay in the market for a long time and realize big profits. For a passive investor, the attitude should be BUY cheap and HOLD for a long time (at least 3 to 4 years).  Don’t be affected with market’s daily volatility.

 

3.                    ETFs – or Exchange Traded Funds are like index funds of a certain Group (i.e. Financial, Agriculture, Technology, etc.) or Country (Emerging Markets, Europe, US, etc.).  You buy these funds just like stoks, hoping it will realize profits in the future. This type of fund is currently not available in the Philippines, but the PSE might soon introduce some (just waiting for SEC’s approval). If you’re interested with ETFs, you may want to open an offshore account – or open premier accounts with reputable banks like HSBC (HSBC Premier) and Citibank (Citigold).

 

4.                    Rural Bank Time Deposit – rural banks offer higher interest rates than commercial banks. Others can even offer as high as 20%p.a. for a 5-year placement. Though I admit, there are inherent risks involved, as rural banks are perceived as less stable than commercial banks. As these rural banks are also insured by PDIC (max of Php250K), then to completely protect your money, open TD accounts with Php250K as ceiling – or if you have more funds, then break up the deposits to multiple accounts (others put it under the names of their family members, or you can talk to the bank on how you can chop your funds to ensure every centavo is protected within the PDIC limit. So what happens to the interest earned? Other rural banks offer PDC payment or automatic deposit to your commercial bank account.  You can check my previous post for more details about investing in Rural Banks.

 

5.                    Open Offshore Account – opening an offshore account allows you to invest in foreign funds and stock markets. But, if you reside in the Philippines, your best shot to invest in foreign markets is to open a premier account such as HSBC Premier or CITIGOLD Wealth Management. This type of investment requires you to maintain a total relationship amount with the bank of at least Php4M (inclusive of all deposits, checking, and investments), but to invest in funds will only require you at least $10,000. To know more about it, visit these websites:

 

http://www.offshore.hsbc.com/1/2/home

http://www.hsbc.com.ph/ph/

http://www.citibank.com.ph/

 

 

 

 

 

 

EMERGENCY FUND

As the cliché goes… “the more money you earn, the more money you spend”

 

And for some people, they even spend more money than they earn – just to show everyone that they afford to buy the newest gadgets, the hippest clothes, and the most recent car.

 

Sad, but true, most people don’t think of the future, and would rather spend everything now as if life will shower them with endless supply of money.

 

In this very materialistic world, it is very difficult to save. Many would argue that they don’t earn much every month – so how can they even start saving, a typical life of living paycheck to paycheck.

 

I don’t necessarily agree. If you can afford to buy those gadgets and clothes, then you must be earning enough to save some of it. It just takes discipline and will power.

 

Then, trick your mind – tell yourself, “ I earn less, therefore I have to spend less”

 

If you earn 20K (after tax) per month – automatically save a portion, let’s say 5K, and set it aside where you can’t spend it unless it’s an emergency. In effect, it brings down your salary to 15K – then you have to psych yourself that you only have 15K to spend.  Do it every month, then you’ll find yourself with a substantial EMERGENCY FUND for the rainy days.

 

Emergency Fund is a 6-month to 1-year worth of your living expenses to tide you in cases of emergency, like loss of job, sickness, etc.  This should allow you to get up, and find a new job to get things back to normal. In the event that you lose your job, how can you concentrate in looking for another one, if you’ll be busy thinking where to get your family’s next meal, or how to pay for your monthly bills.

 

Set aside this emergency fund, where it can grow in time (though such money is readily available, no one would really want to be in a position where you would be forced to use your emergency fund – nobody wants to lose his job, right?). Then, you have not only saved for an emergency fund, but such amount can grow, and you can use the interest to finance your wants like to buy new gadgets, clothes, etc. or even to increase your investment portfolio. Most people keep their Emergency Fund in a separate Savings Account, which probably earns less than 1% per annum. I suggest, you find other tools, which can give better growth, but as accessible and liquid as a Savings Account. You can choose to put it in Time Deposit (most Rural Banks give higher returns than Commercial Banks), Mutual Funds, Treasury Bills, etc.

 

Only after you have achieved in saving your Emergency Fund, then you’ll be ready for the next phase – Investing.

 

If you continue your healthy habit of saving every month, you will continue to accumulate more money even after you have completed saving for your Emergency Fund. Those excess funds can now be channeled to other investment tools that can give you even higher rates of return. As they say, “the higher the risk, the higher the return”. Since these are excess funds, you can be as wild as you can in satisfying your investment appetite, anyways you still have your regular job to pay for your usual expenses, and your emergency fund just I case the worst happens.

 

 

 

 

 

 

MUTUAL FUND 101

Do you want to know more about Mutual Fund? Here are some basic concepts.. (Q&A lifted from http://www.philequity.net/investorEducation.php).

If you want to know more about Mutual Fund, visit  http://www.philequity.net/index.php

 

What is a mutual fund?

A mutual fund is an investment vehicle that pools together the funds of various investors—both individuals and corporations. The pool of funds is managed by a professional fund manager who uses the funds to create a diversified investment portfolio consisting of various investment instruments such as stocks and bonds.

What are the benefits of investing in a mutual fund?

For an affordable initial investment amount, you gain access to various potentially higher yielding investments normally available to investors with much larger funds to invest.  A mutual fund makes this possible because it pools together the funds of hundreds or even thousands of small investors.  The pool of funds is therefore large enough to access these potentially higher yielding investments.  

Mutual fund investors also benefit from the investment management expertise and market knowledge of the team of professional fund managers that manages the pool of funds.  These fund managers ensure that the funds are optimally invested and diversified at all times. Therefore, you don’t need to watch the markets yourself since there is a team that is already doing it for you.

How much will I earn if I invest? 

Mutual funds are not time deposits and therefore do not pay out a fixed rate of return. Mutual funds invest in stocks listed on the stock exchange as well as bonds issued by the government and corporations. As a result, the value of your investment fluctuates daily depending on the performance of the underlying investments.  Because of this, your return cannot be guaranteed. Your actual rate of return depends on many factors such as the performance of the underlying investments as well as general market and economic conditions.  However, over the long-term, investments in mutual funds outperform traditional time deposit placements.

Is my principal secure? Can I lose money? What are the risks of investing? 

As with all other investment instruments, investing in mutual funds involves a certain amount of risk. Stock and bond prices go up and down daily.  So as the value of the underlying instruments in which the pool of funds was invested fluctuates, so does the value of your mutual fund investments.  Depending on market conditions, there may be periods in which you may lose money.  However, until you actually liquidate or withdraw your investment from the fund, these will simply remain “paper losses” which can be recovered when market conditions stabilize.

Moreover, the fund managers of the fund also do several things to control and minimize risk. First, they analyze all investments thoroughly before including any stock or bond in the portfolio.  Second, they ensure that the fund is properly diversified, i.e., invested in many different stocks or bonds.  As such, a drop in the price of one investment may be off-set by gains in another. Third, the fund managers are subject to regulatory and internal investment restrictions that prevent the fund from being invested from certain speculative investments and encourage proper diversification

While there are risks in mutual fund investing, the returns can also be rewarding in the long-run. There is always a risk-return trade-off in any investment.  What is important is to know how much risk you are willing and able to take and select an investment whose risk profile matches yours.

What is diversification? Why is it important? 

Diversification simply means “not putting all your eggs in one basket”.  This is especially important in investing.  In a well-diversified portfolio, losses from some investments can be off-set by gains in other investments.  This reduces the overall fluctuations or volatility of the value of the portfolio. By investing in a mutual fund, you gain instant access to a diversified portfolio of investments. It is, however, also important to realize that not all risk can be diversified away. There are certain economic, market and political factors which may affect all investments adversely.

How do I invest in a mutual fund?

You can participate by buying shares of the mutual fund.  The price of these shares, also known as the Net Asset Value Per Share or NAVPS, changes daily depending on the performance of the underlying investment portfolio.   As the NAVPS increases, the value of your investment also increases.  The mechanics of investing in a mutual fund are very similar to buying shares in the stock market.  The specific requirements for investing in one of Philequity’s funds are listed in a separate section of this website.

What is the net asset value per share, or NAVPS? 

The net asset value per share (NAVPS) is the value of each share of a mutual fund. A fund’s NAVPS is calculated daily and is the price used when purchasing or selling mutual fund shares. To determine the value of your shares, simply multiply the number of shares you own by the NAVPS.

How do I withdraw my money from the mutual fund?

You simply need to sell your shares in the mutual fund.  The price at which you sell these shares is the NAVPS for the day.  You will get the proceeds of your withdrawal within seven (7) banking days.  Please refer to the separate section for detailed procedures on withdrawals.

What happens to my investment if something happens to me?  

Your shares in the mutual fund will form a part of your estate and will be distributed to your heirs (usually surviving spouse and children) accordingly. Rest assured, your investment will not disappear, or be “taken back”. To ease the transfer of the fund shares you may want to consider opening a joint account or trust account.

Is my investment covered by the PDIC? 

No. A mutual fund is not a deposit product and is, therefore, not covered by the PDIC.  However, when you invest in a mutual fund, you are considered a shareholder and in effect are entitled to your proportional share in the total assets of the fund.  The PDIC, on the other hand, only insures up to P250,000 of your total deposits with a bank and not your entire investment amount.

SAVE & INVEST

 

Create a separate bank account where you can keep 20% of your monthly take home pay for savings and investment. Come up with a 6-month emergency fund (let’s say 100K), any amount after that should be transferred to another investment vehicle, which can yield higher than bank’s interest rate. Depending on your appetite, you can invest in time deposits, mutual funds, t-bills, treasury bills, or stocks.

 

My simple formula

-          save 6-month emergency fund; any amount in excess..

-          invest in mutual funds

-          invest in stocks

-          invest in employee stock options

since my appetite is still aggressive. With my limited funds, I’d like maximum growth with the least possible time

 

as you grow your investment portfolio, you become more conservative, since you’ll now shift from wealth accumulation to wealth protection. That’s why most people still prefer bonds from banks than gambling in the stock market, especially if you have so much at stake.

 

*Emergency Fund – amount you keep if in case you lose your job… this amount should temporarily provide for your obligations and needs while you’re in the process of looking for another job… there is no standard amount pegged as an emergency fund—it depends on your lifestyle and existing obligations (i.e. car or house amortization).

This will fund your needs should something happen, such as a job loss or illness. This should be at least six months’ worth of your regular expenses. Put this money in an easily accessible account, such as a time deposit or mutual fund or unit investment trust fund. Don’t touch this fund to meet other needs, such as down payment for a car. That should be financed by separate savings.