Know your instruments
Here’s a guide to help you understand the instruments.
1 Special Savings Accounts are very short-term deposits or placements with a bank. Terms can be as short as overnight, one week to one month. The banks would pay a special savings interest rate at maturity.
2 Time Deposits. Rates are higher than special savings for longer tenors which range from a month to a year.
3 Long-term Negotiable Certificates of Deposits. This type of deposit has a tenor of at least five years. Rates quoted are higher than special savings or time deposits.
4 Special Deposit Account (SDA). It is a short-term deposit with Bangko Sentral ng Pilipinas (BSP). Tenors range from two weeks to two months.
[The BSP launched it in November 1998 to mop up excess inflation. Offered by trust departments of banks, SDAs are relatively risk-free as they are guaranteed by the BSP. SDAs offer relatively higher interest rates than regular savings or time deposit accounts.]
5 Fixed-rate Bonds. A bond is essentially an “I-Owe-You.” It is a form of promissory note wherein you are lending to a government or a corporation (“Issuer”) at a fixed interest rate for a specific period.
Bond interest rates vary depending on the borrower’s perceived ability to pay its obligations (“risk rating”) and how long such obligations are (“tenor”).
Governments are considered higher rated as they are less likely to default on principal and interest payments when these become due; hence government bond rates are usually lower than corporate bonds.
6 Stocks. If bonds represent a debt obligation to you by a government or a corporation, stocks (or shares) signify ownership. When you buy a company’s share, you become a part-owner, together with the other shareholders. One earns from stock investments via dividends and/or the capital gains when you purchase and then sell stocks for a profit.
Locally, there are two types of stocks: preferred and common.
While both make you part-owner of a company, preferred shares provide you with a fixed dividend rate paid out periodically as long as the company is profitable.
Holders of common stocks receive dividends only after all the holders of preferred stocks have received their payments. However, holders of common stocks have voting rights.
7 Mutual Funds/Unit Investment Trust Funds (UITFs). Mutual funds and UITFs are professionally managed collective investment companies that pool money from various investors and put their money in a combination of bank deposits, fixed-rate bonds and stocks.
Mutual fund companies issue shares to the investors to signify their ownership in these companies. UITFs are similar to mutual funds but are managed by bank trust departments.
Instead of shares, a trust issues participation (units) to its investors.
There are four main types of mutual funds:
Money Market Funds invest purely in short-term bonds and deposits.
Bond Funds invest mostly in long-term fixed-rate bonds.
Balanced Funds invest in a combination of stocks, fixed-rate bonds and deposits.
Stock Funds/Equity Funds invest primarily in stocks.
8 Variable Unit-linked Insurance Products. The policyholder is able to select the funds where his or her money will be invested. There are different types of products but the death benefit is typically the policy face amount or the fund value, whichever is higher.
9 Real Estate. Properties and/or permanent structures such as land, buildings, houses, apartments, condominiums, retail stores, factories, etc. for residential, commercial or industrial use. One can earn via buying and selling these properties for profit or via rental or leasing out of such properties to tenants.
(Valerie Pama is the chief operating officer of Sun Life Asset Management Co.)