BOND FUNDS

One of the earliest Mutual Funds in the Philippines is the Bond Fund.

On the average, Peso Bond Funds over the past three years have earned 6% per year, while Dollar Bond Funds have earned an average of 3% per year over the past three years.

Bond Funds are comprised mostly of government issued bonds mixed with corporate bonds, capital bonds, retail treasury bonds, cash and time deposits.

It only takes P5,000.00 to start a Bond Fund investment. I’ve seen many people buy mobile phones worth more than that, every six months.

What are Bonds?
Bonds are loans that are certified by the borrowing entity like the national government, a corporation and in some cases local government unit.

How safe are bond investments?
Government bonds are as good as cash. Money in your wallet is a legal tender certified by the government with the words “ANG SALAPING ITO AY BAYARIN NG BANGKO SENTRAL AT PINANANAGUTAN NG REPUBLIKA NG PILIPINAS”. Government bonds are certified in the same way.

How does a bond work?
When a government’s projected spending is more than its projected collection it has to borrow money to fund is projects. One way to borrow money is to issue bonds.

The government floats bonds to financial institutions, for example a loan payable in five years at an interest of 5% per year. If financial institutions agree with the terms and wish to loan a total of 20 billion pesos, then 5-year bonds with a total worth of 20 billion pesos with annual interest of 5% are issued by the government to the financial institutions.

Financial institutions have many ways to make money out of it before the 5-year bond matures, like resell these bonds in smaller chunks and higher interest rates, or use these as assets to back up loans. The question is how do you make it work for you?

MAKING BOND FUNDS WORK FOR YOU

Understand that Bond Funds are Mutual Funds as such these are investments whose value fluctuate everyday due to everyday trading, but will always earn more than a time deposit.

I’ve met people who have hundreds of thousands of pesos decaying in savings accounts and checking accounts.

Savings and checking accounts are good for business transactions and emergency fund. Multiply your monthly expenses by three and that’s your emergency fund. If you have a business, you know your monthly expenses and how much money you need in the bank.
How much more of your savings and checking account money is left? Invest that in the Bond Fund.

Emergency Money in a Bond Fund makes more sense
Your savings and checking account gives you an interest of 1% per year, less 20% income tax every year. So after a year your P20,000.00 becomes P20,160.00

A Bond Fund has an entry fee of 2%, you have to lock it in for a year, then after that it will no longer be subject to any fees or taxes. So your P20,000 becomes P20,580.00 after a year.

The best part is after five years your P20,000 in the bank becomes P20,812.90 while your P20,000.00 Bond Fund investment would have reached P25,000.00 during the same period.


Bond Funds are not investment tools. Bond Funds are financial instruments that can create a buffer or emergency fund better than savings and checking accounts or time deposits.


Knowing your monthly expenses opens you up to investment possibilities. Let’s have a run through:
1. Multiply monthly expenses by three, and deposit this amount in your savings or checking account.
2. Multiply monthly expenses by three, and invest this amount in Bond Funds.
3. Calculate your monthly expenses every quarter to check if you need to increase your emergency fund.
4. Let your Bond Fund grow
5. Remember the 10-20-70 rule for income? 10% goes to tithes, 20% goes to investments, 70% spend on yourself and family.
6. Once your emergency fund is set you can then invest in other financial vehicles.

Last tip: Understand what events should eat up your emergency fund
1. Loss of income – if you lose your job you have six months to find a new one. If this is not too comforting increase your bond fund emergency fund to comfortable levels.
2. Sickness and accidents – if you or an immediate family member gets sick and you don’t have health insurance touch your emergency fund.
3. Other people – This should fall under the 70% of the 10-20-70 income rule. If they frequently ask you for financial help, they won’t be able to help you financially in your time of need. Your emergency fund is for you, your spouse and your children.
4. Replace a lost item, like mobile phone – falls under 70%
5. Tuition – falls under 70%. While future tuitions should be planned and part of 20%
6. Car or House needs repair – touch your emergency fund. Although if you practice preventive maintenance then this should be under 70%
7. A business opportunity – get from 20%, and skim from 70%

Make a chart of events that occur or may occur in your life and identify these if they fall under the 10% or 20% or 70%.