PART
11 |
LIQUIDITY
AND RETURNS |
Liquidity
“How quickly can I withdraw my money when I need it?”
This is a question about liquidity. Again, savings deposits
are the most liquid instruments. You can withdraw from them
anytime if you have access to Automated Teller Machines or
ATMs. Time deposits cannot be withdrawn until their term is
finished. These may be 30, 60, 90 days or longer. Again, the
down side of these relatively liquid investments is their
low return.
Fortunately, there are now investments that can give you greater
liquidity and higher returns. Banks, especially the large
ones, offer Unit Investment Trust Funds (UITF).
Although you cannot withdraw them during prescribed minimum
holding period (which can range from 30 to 90 days), you can
withdraw from them anytime after that subject to certain conditions.
However, unlike savings and time deposits, UITFs are not
insured nor guaranteed by any institution. So, theoretically,
you can lose most, if not all, of the money you invested.
Also, UITFs, even within one bank, have different returns.
Some perform well, others, badly. You have to choose the UITF
that fits your requirements and expectations. You need to
know and understand what instruments the UITF is investing
your money in. We will discuss these in a succeeding section.
Again, ask your bank about UITFs and their individual performance.
Mutual Funds are invested and managed much like UITFs. However,
banks are not allowed to sell mutual funds. You can invest
in mutual funds through insurance companies.
Return
You won’t invest your money if you are not expecting
it to give you any return. Interest, dividends, and rent payments
are different forms of earnings that give
you a return on your investment. Appreciation
in the value of the asset you invested in, for example, land,
buildings, or foreign currency, is another source of return
on your investment.
Interest earnings are a common form of return on your investment.
Let us say you invested PhP 100,000. If you earn interest
of 10% p.a. (“per annum” or per year) this means
you will receive an interest income of 10% of PhP 100,000
or PhP 10,000 for every year that your investment is active.
This income may be paid to you in quarterly, semi-annual,
or annual installments. In this kind of investment, the value
of your investment (called “principal”, in this
case) remains the same at PhP 100,000.
If you invest in UITFs or in mutual funds, you will not receive
interest payments. Depending on the investments of the UITFs
or mutual funds, your PhP 100,000 may grow or lose value across
time. If investments are managed well, you may not have to
wait for a year for your money to grow to PhP 110,000. However,
if the funds are poorly invested, your money may also go down
in value to, say, PhP 90,000. See Appendix F for a description
of different types of mutual funds.
In comparing the returns on different kinds of investments,
it is very important to consider the taxes
applicable to both the returns and the investment. For example,
if you invest in land or buildings, you have to pay annual
real property taxes. If the value of the land appreciates
and you sell it, you have to pay several taxes and fees. With
a few exceptions, all income from investments handled by banks
is subject to taxes and fees. Ask your bank to show you the
return on your investment net of taxes and fees.
PART
12 |
COMPARISON
OF SAVINGS INSTRUMENTS |
As
an individual, you can directly put your money into:
Instrument |
Safety |
Liquidity |
Returns |
| Savings
and time deposits |
Insured
up to PhP 250,000 by the PDIC |
Savings
accounts very liquid; Time Deposits, not as liquid |
Very Low |
| Money
Market Instruments |
No
guarantee; not insured, but low risk depending on the
particulars of the instrument |
Short-term:
usually around 30 days |
Low
to Moderate |
| Retail
Treasury Bonds |
Guaranteed
by the Philippine Government |
Minimum
holding period may be required; small penalties if withdrawn
early |
Moderate
to High, usually moderate |
| UITFs
–invested into other instruments. See below. |
No
guarantee; not insured. Risk depends on the specific investment
instruments in the fund |
Minimum
holding period required; but relatively liquid after that
|
Return
is different for every fund. Historical performance and
future prospects are important guides. |
| Mutual
Funds–invested into other investment instruments.
See below. |
No
guarantee; not insured. Risk depends on the specific investment
instruments in the fund |
Minimum
holding period may be required; small penalties if withdrawn
early |
Return
is different for every fund. Historical performance and
future prospects are important guides. |
| Stocks
|
High
risk. No guarantee; not insured. Risk depends on the performance
of the company issuing the stocks and factors affecting
the stock market. |
Traded
in the stock exchange. Liquidity depends on the availability
of buyers for a specific stock. |
Return
varies widely. Historical performance and future prospects
are important guides. |
UITFs and Mutual Funds, in turn, are invested into
Instrument |
Safety |
Liquidity |
Returns |
| Money
Market Instruments Moderate |
No
guarantee but low risk depending on the particulars of
the instrument |
Short-term:
usually around 30 days |
Moderate |
Government
Securities (RTBs, Treasury Bills, Treasury Notes, Dollar-Linked
Notes, etc.)
|
Guaranteed
by the Philippine Government (See Appendix
E for a description of different types of
Government Securities.) |
Minimum
holding period may be required; small penalties if withdrawn
early |
Moderate
to High; but Usually Moderate |
| Corporate
Bonds/ Commercial Papers |
No
guarantee; not insured. Risk depends on the specific Company
issuing the bond/paper |
Depends
on the terms and conditions of the bond/paper |
Moderate
to High; but usually higher than Government Securities |
| UITFs
–invested into other instruments. See below. |
No
guarantee; not insured. Risk depends on the specific investment
instruments in the fund |
Minimum
holding period required; but relatively liquid after that
|
Return
is different for every fund. Historical performance and
future prospects are important guides. |
| Mutual
Funds–invested into other investment instruments.
See below. |
No
guarantee; not insured. Risk depends on the specific investment
instruments in the fund |
Minimum
holding period may be required; small penalties if withdrawn
early |
Return
is different for every fund. Historical performance and
future prospects are important guides. |
| Stocks
|
High
risk; not insured. No guarantee. Risk depends on the performance
of the company issuing the stocks and factors affecting
the stock market. |
Traded
in the stock exchange. Liquidity depends on the availability
of buyers for a specific stock. |
Return
varies widely. Historical performance and future prospects
are important guides. |
How do you balance safety, liquidity,
and return?
You start with your investment objective(s).
At this point, we are assuming that you are investing an amount
that is over and above what you already planned and budgeted
for the Insurance, Retirement, Education, Health, Housing and
Consumption needs of yourself and your family. In other words,
going back to the Family Budget, this amount is already the
surplus you generate from your income after
you deduct your monthly contribution, Y and
your monthly expenses, V, from your monthly
income.
|
