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Financial Investments

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A financial investment is a document that states the legal obligation of an investor to transfer something of value to another investor at a future date, under certain conditions. Investors put their money in financial investments in the hopes of growing their money. Financial investments however carry varying degrees of risk. Individuals who are planning to invest in these types of opportunities should therefore properly assess their risk and return.

In the Philippines, financial investments are issued by bank, non-bank institutions and the Philippine National Government. Banks offer a variety of financial products and services that are specific to the needs of their clients. Non-bank institutions represent private corporations and other financial investments that also sell financial investments. The Philippine National Government, on the other hand, offers securities and financial options to the public.

Source: “Money, Banking, and Financial Markets” by Cecchetti Schoenholtz

Bank

1. Savings

savings

 

Savings are the most basic type of deposit instrument with low interest rates. They are mostly used for safekeeping purposes.

 

 

how-do-you-earnHow do you earn?

Savings accounts are interest bearing.

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Advantages 

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Disadvantages 

 
  • Easy access of funds – savings accounts allow the withdrawal of funds at any time in accordance with bank regulation.

  • Low initial investment – savings account require low investment amount to start with.

  • Low risk – savings accounts are insured by the Philippine Deposit Insurance Corporation (PDIC).

  • Flexibility with minimal charges – savings accounts allow automatic deductions for bill-pay and minimal monthly fees.
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  • Low return – savings accounts generally have the lowest return in comparison with other types of investments.

  • Low maintaining balance – savings account require minimum balance requirement.

  • Insurance limitation – PDIC only insures accounts up to P 500,000 per depositor.

2. Demand Deposits

demand-deposits

Demand deposits, which are commonly known as current/checking account, are simple deposit instruments with no interest. This instrument is used to settle payments/ obligations by issuing checks which are backed by a maintaining balance in a current account. Demand deposits also create a detailed documentation of payments and transactions.

 

 

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Advantages 

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Disadvantages 

 
  • Safety – demand deposits are insured by the PDIC.

  • Easy transaction – demand deposit holders have access to banking products such as online and mobile banking, ATMs, debit cards and checks to make purchase or withdraw funds from the account.
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  • Transaction fees – demand deposits come with an array of fees that an account holder may incur. A demand deposit is not a credit line. Issuing checks should be backed by a maintain balance in a current account. It is a criminal liability to issue bouncing checks.

  • Withdrawal limitations – demand deposits are subjected to maximum withdrawal.

  • Maintaining balance and penalty fees –demand deposits require minimum balance and charge a fee if the account balance is lower than minimum.

3. Time Deposits

time-deposits

 

Time deposits are savings instruments that offer slightly higher interest than savings account. The fixed rate is based on current market situation. No withdrawals should be made during the placement period. Interest is earned at the end maturity period.

 

 

how-do-you-earnHow do you earn?

Time deposits are interest bearing.

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Advantages 

dis-advantage 

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 Disadvantage 

 
  • High interest rate – time deposits earn slightly higher interest rate than savings account.

  • Low risk – time deposits have assured return of investment.

  • Low minimum investment – time deposits require small amount of starting investment.
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  • Deposits are not easily accessible– money in time deposits is locked away until the maturity date. There are associated penalty if the time deposits are withdrawn before maturity.

 

4. Foreign Currency Deposit

foreign-currency-deposits

 

Foreign Currency Deposit is a savings instrument similar to a peso savings account which allows depositors to earn interest. The interest rate of foreign currency deposit fluctuates in accordance with the foreign exchange.

 

 

how-do-you-earnHow do you earn?

Dollar Savings Account are interest bearing.

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Advantages 

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Disadvantages 

 
  • Easy access of funds – foreign currency deposit allows withdrawal of funds at any time in accordance to bank regulation.

  • Low investment foreign currency deposit require low investment amount to start with.

  • Low risk foreign currency deposit are insured by the PDIC.

  • Low transaction cost foreign currency deposit allow automatic deductions for bill–pay and minimal monthly fees.
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  • Low return – foreign currency deposit generally have the lowest return in comparison with other types of investments.

  • Minimum balance – foreign currency deposit require minimum balance requirement.

  • Insurance limitations – the PDIC only insures accounts up to P 500,000.

  • Withdrawal limitations – banks charge fees and limit withdrawals of foreign money in hard currency in accordance to the Anti–Money Laundering Act.

 

5. Dollar Checking Account

dollar checking account

 

Dollar Checking Account is a savings instrument that is similar with the demand deposits only it is dominated in US dollars. This instrument also does not earn interest.

 

 

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Advantages 

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Disadvantages 

 
  • Safety – dollar checking accounts are insured by the PDIC.

  • Easy transaction – dollar checking account holders have access to bank products such as online and mobile banking, ATMs, debit cards and checks to make purchase or withdraw funds form the account.
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  • Transaction fees – Many dollar checking accounts come with an array of fees that an account holder may incur.

  • Withdrawal limitations – dollar checking accounts are subjected to maximum withdrawal.

  • Minimum balance – dollar checking accounts require minimum balance and charge a fee if the account balance is lower than minimum.

 

6. Long Term Negotiable Certificate of Deposits (LTNCD)

Unit Investment Trust Funds

 

Long Term Negotiable Certificate of Deposits (LTNCD) are debt instrument sold by a bank that pays annual interest and matures in 5 years.

 

 

how-do-you-earnHow do you earn?

LTNCD pays annual interest for five years. Interest rate is fixed for 5 years.

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Advantages 

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 Disadvantage 

 
  • Safety – LTNCDs are covered by PDIC up to P 250,000.

  • Easy access of funds – LTNCDs can be liquidated anytime at the current market price, but the investor has to pay withholding taxes if held for less than five years.

  • Taxes– LTNCDs are not subjected to withholding tax if kept until maturity.
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  • High starting investment– LTNCDs require large sums of money for deposit.

 

 

7. Unit Investment Trust Fund (UITs)

Unit Investment Trust Funds

 

Unit Investment Trust Funds (UITs) are bank investments that allow the pooling of funds from different investors with similar investment objectives. Investors participate by “buying” participating units or shares of funds. The fund is managed and operated by a financial institution and other similar entities called “trust entities”.

 

 how-do-you-earnHow do you earn?

At the start of the agreement, the fund value is determined together with the value of each participating unit of investment – this is the investor’s purchase price. It often called the Net Asset Value per Unit (NAVPU).   

After a period of time, the same investor may decide to redeem or withdraw his money. The Net Asset Value per Unit is computed to determine the investor’s selling price. The difference between the selling price and purchase price is the profit or loss of the investor.

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Advantages 

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Disadvantage 

 
  • Easy access of funds – investor’s share on the UITFs can be withdrawn and sold anytime. It can be converted to cash either by withdrawing or selling.

  • Diversification of Investment – UITFs allow investors to participate in various types of instruments because the pool of fund is invested in diversified financial instruments.
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  • Risky – initial investments are not covered by the PDIC. There is no guaranteed rate of return because UITFs earn through the spread between the UITFs’ purchase price and selling price. Both prices are based on prevailing market prices.

Sources: Bureau of Treasury, Bangko Sentral ng Pilipinas, private banks and other bank-related websites

Government Securities

1. Treasury Bills

treasury-bills

 

Treasury Bills are government securities that mature in less than a year. It has three tenors: (1) 91 day (2) 182-day (3) 364-day Bills. Treasury Bills do not bear interest.

 

 

how-do-you-earnHow do you earn?

T-Bills are issued and sold at a discount. They are redeemed at maturity for the full face value of the financial instrument.

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Advantages 

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Disadvantages 

 
  • Secured – T-bills are some of the safest investments you can buy. The law requires the Treasury to pay them back.

  • Low transaction cost – T-bills can be bought directly from the Treasury. In this case, the purchase of T-bills is fee-free and commission-free.
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  • High starting investment – T-bills can be purchased at P 100, 000.

  • Low return – T–bills offer relatively low return given their safety.



 

2. Treasury Bonds

treasury-bonds

 

Treasury Bonds are government securities which mature beyond one year. Bonds have five maturities: (1) 2 year (2) 5 year (3) 7 year (4) 10 year and (5) 20 year.

 

 

how-do-you-earnHow do you earn?

Treasury Bonds are interest bearing and can be traded in the secondary market before maturity.

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Advantage

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Disadvantages 

 

 

  • Minimal risk – Treasury bonds are issued by the government, lending them certain stability. They are relatively safe.
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  • Low interest – T-bills offer low interest given their safety.

  • Early redemption limitations – Treasury bonds cannot be redeemed before maturity. They mature longer than T-bills.

 

3. Retail Treasury Bonds (RTBs)

retail-treasury-bonds

 

Retail Treasury Bonds (RTBs) are government securities similar to treasury notes, but they mature longer (10 years and above).

 

 

how-do-you-earnHow do you earn?

They are interest bearing and carry a term of more than one year and can be traded in the secondary market before maturity.

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Advantages 

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Disadvantage 

 
  • Affordability – Retail Treasury Bonds can be purchased at P5, 000.

  • Minimal risk – Retail Treasury Bonds are issued by the government; therefore, they are fully backed. The government rarely defaults on a debt security.

  • Liquidity – It can be traded in the secondary market prior to maturity.
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  • Low interest – Retail Treasury Bonds offer relatively low interest given their safety.

 

4. Dollar Linked Peso Notes (DLPNs)

Dollar-Linked-Peso-Notes

 

Dollar Linked Peso Notes (DLPNs) are government securities that are interest bearing and carry a term up to 25 years.

 

 

how-do-you-earnHow do you earn?

They are interest bearing and can be traded in the secondary market before maturity.

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Advantage 

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Disadvantage 

 
  • Minimal risk – Dollar Linked Peso are issued by the government; therefore, they are fully backed. The government rarely defaults on a debt security.
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  • Volatility – Dollar Linked Peso Notes are subjected to interest rate risk and foreign exchange risk. Payments of interest and principal are linked to the movement of the exchange rate.

Sources: Bureau of Treasury and Private Banks

Non-bank Investments

1. Corporate Bonds

corporateBonds are fixed-income security that allows individual investors to lend money to issuers. Those that are issued by corporations are called corporate bonds. They are based on the financial health of the corporation, which can be determined through audited financial statements and annual reports.

Corporate bonds are regulated by the Securities and Exchange Commission under the Securities Regulation Code (Republic Act No. 8799) and the Revised Securities Act (Republic Act No. 178).

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  • Initial investments will be periodically returned with interest within a term. The term will end when it reached its maturity.
  • Corporate bonds can be resold as long as the payment is higher than the original price to ensure profit.

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Advantages 

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Disadvantages 

 
  • Reliability of income – Investing in corporate bonds guarantees a steady flow of income until it reaches maturity.

  • Safety – Corporations are evaluated and rated based on their credibility through audited financial statements and annual reports. Choosing the highest rated corporations is a prudent way of ensuring an investor’s safety. It is always wiser to study the market first before purchasing a corporate bond.

  • Variety – Depending on the investors’ preferences, they can choose to purchase corporate bonds from many different sectors.

  • Marketability – The market for corporate bonds is large. Therefore, there are higher possibilities of selling corporate bonds than government and municipal bonds.
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  • Possibility of issuer to default – The corporation that issued bonds can default on the promised repayments. This is when issuers fail to complete payments within the term. It may happen when the corporation experienced financial setbacks or went bankrupt.

  • Low liquidity – Individual bonds in general are long-term investments. Therefore, it is not readily convertible to cash.

 

2. Stocks

stocksWhen an investor buys stocks, he is actually buying shares of ownership of an enterprise. This makes them entitled to the net income and assets of the corporation. When investors purchase stocks, they are called shareholders or stockholders.

Entities who may hold shares are:

  • Individuals
  • Pension funds
  • Mutual funds or investment companies
  • Banks
  • Insurance companies

Stocks are risky because it is prone to fluctuation. However, they are regulated by the Securities and Exchange Commission under the Securities Regulation Code (Republic Act No. 8799) and the Revised Securities Act (Republic Act No. 178).

Types of stocks

diff stocks

a. Common Stock

Majority of stocks issued are common stocks. In this type, investors have privileges such as:

  • Dividends on a percentage of the company’s profits
  • Ability to choose through voting who to elect as board members
  • Higher yields due to capital growth

Setback:

  • If the company opts to liquidate, common shareholders will receive compensation only after preferred shareholders, bondholders, and creditors are paid.

b. Preferred Stocks

Preferred shareholders benefits are:

  • Fixed dividends
  • Priority -  in case the corporation goes bankrupt, they are to be paid before common shareholders

This type can be bought back by the corporation at any time.

c.Other types of stocks

Policies of private corporations vary according to their preferences. Therefore, there are customized types of stocks depending on the corporation.


how-do-you-earnHow do you earn?

  • Shareholders have claims or dividends on the corporations’ profit.
  • Stocks can be resold as long as the payment is higher than the original price, to ensure profit.

Investors may inquire about yields through their stockbrokers.

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Advantages 

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 Disadvantages 

 

 

  • High return – The stock market tends to fluctuate more often than other types of financial investments. In spite of this, it has higher growth in the long run and has the most potential for high returns.

  • Liquidity – Investors can easily convert their shares to cash by reselling. Stocks are always readily sellable because the stock market is always active.

  • Availability of Information – News on the stock market are being reported at all times because it is closely watched by investors all over the world. Investors can monitor the market through the internet, newspapers, and television news reports.

  • Ownership – Investors have shares of ownership in a corporation.
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  • High risk – Stocks pose high risk because of fluctuation in the stock market.

  • Time consuming – Aside from investing money, investors also need to devote time in monitoring the stock market. Research is very important to know the movement of stock prices.

3. Mutual Funds

Mutual Funds, also called Investment Companies, pool money from individual investors. The collected amount is used to purchase bonds and stocks in order to form a diversified portfolio of security investments. Individuals can buy shares of a mutual fund. They are called owners or shareholders.

Mutual funds are regulated by the Securities and Exchange Commission under the Securities Regulation Code (Republic Act No. 8799) and the Revised Securities Act (Republic Act No. 178).

Mutual funds can buy, hold, and sell assets depending on its objectives. The following are kinds of mutual funds in the Philippines:

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how-do-you-earn How do you earn?

Shareholders earn through receiving yields. Yields are made depending on the type of mutual fund. These are through:

  • Reselling shares as long as the payment is higher than the original price
  • Receiving cash dividends for being shareholders
  • Earning through interest rates

Investors may know more about yields through their investment managers.

 

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Advantages 

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Disadvantages 

 

 

  • Professional management – Investors have the benefit of having full-time investment managers who study the market and select products that have greatest potentials of high returns.

  • Diversification – Mutual funds are invested in many different securities including stocks and bonds.

  • Liquidity – It can be easily converted into cash because the fund itself can immediately buy the shares back within the current Net Asset Value per Share.

  • Safety – The Securities and Exchange Commission regulates mutual funds as stated in the Investment Company Act (Republic Act No. 2629). This protects current shareholders and assures potential investors.

  • Potentially higher returns – Professional investment managers handle mutual funds. Compared to individual investors, these professional managers have skills and experience, which they use for the advantage of mutual funds.

  • Tax exemption – The Comprehensive Tax Reform Program (CTRP) states that mutual funds are non-taxable to promote long-term savings in the Philippines.
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  • Lack of control – Decisions are made by professional financial managers. Therefore, individual investors cannot direct the buying of shares.

  • Uncertainty of returns - Philippine law forbids mutual funds to guarantee returns.

  • Fees – Deductions such as management and redemption fees, and sales commissions are subtracted from the investor’s yield.

 

4. Cooperatives

Enterprises which are owned by its members are called cooperatives. Anyone can become members of the cooperative by volunteering. Members manage, control, and decide for the cooperative.

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How members benefit

Cooperatives aid its members by:

  • Helping them increase income, save money, and have purchasing power through providing goods and services
  • Providing social and economic benefits
  • Educating them of effective ways of engaging in cooperatives
  • Giving innovative business ideas
  • Cooperating with the government, organizations, and other cooperatives to boost projects and help achieve its objectives

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Advantages 

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Disadvantages 

 

Under the Republic Act 9520, registered cooperatives enjoy the following:

  • Government privileges – can deposit belongings in the safes of municipal or city treasurers and other government offices free of charge

- cooperatives with government employees as members can freely use any available space in their agency

- exemption from pre-qualification bidding requirements when transacting business with the Government of the Philippines

- free provision of provincial or city fiscal representatives or the Office of the Solicitor General, except when the other party is the Republic of the Philippines

  • Franchise – Those that provide special services shall have a franchise. Individuals who are qualified to serve shall be allowed to be members.
  • Preferential treatment – priority on fertilizer and rice provisions

- Those who produce agricultural commodities have the preferential right to supply government institutions.

- entitlement to management of public markets and lease of public market facilities

- those with faculty member have rights in managing canteens and other services within the educational institution they are employed

  • Loans – They are entitled to loans, credit facilities, and other related services tied with:
    • Development Bank of the Philippines
    • Philippine National Bank
    • Land Bank of the Philippines
    • other financial institutions except the Central Bank of the Philippines
  • Housing finances – housing funds shall be made available to qualified cooperatives
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  • Lack of individual control – a member cannot decide on his/her own; all decisions should be agreed by majority of the members

  • Conflict possibility – not all members agree with each other

  • Timely decision-making process – it may take a longer time to arrive on a decision

5. Microfinance Institutions (MFIs)

Microfinance provides various financial services to low-income households and their microenterprises. These services include:

 

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Deposits  Loans  Payment Services  Money transfer  Insurance products

Microfinance is available to economically active but entrepreneurial, poor individuals.

Benefits

Microfinance helps its beneficiaries by:

  • Giving microenterprises a boost in order for their business to grow
  • Providing easy access to financial services without high interest rates

6. Insurance Products

Insurance is a form of risk management that provides financial security in times of unexpected need. It entitles insurance holders and their beneficiaries to receive monetary assistance from insurance providers. Beneficiaries could be anyone specified by the insurance holder including his family and loved ones.

Anyone can avail insurance products as long as they pay monthly contributions to the insurance institution’s funds. Contributions are called premiums.

Insurance products are safe investments because they are regulated by the Insurance Code of the Philippines (Presidential Decree No. 612) and the Insurance Act (Act No. 2427).

Types of Insurance Products

The different types of insurance products cater to needs they are intended to assist. The following are:

a. Life Insurance

family

It is is intended to give assistance to beneficiaries after the insurance holder’s death.

They benefit through:

  • Family financial protection
  • Savings – whether the insurance holder lives or dies, he will have an accumulated fund.

 

b. Health Insurance

health

It aims to provide for the insurance holder the moment he experiences significant health issues. He can also use his health insurance for his beneficiaries.

 

 

 

c. Property insurance

fire

In this type, the insurance provider will compensate for any property losses due to theft, fire, and damages.

 

 

 

d.Travel insurance

travel

 

Loss of belongings, health issues, and physical damage obtained during travel are covered by travel insurance.

 

 

 

e.Car insurance

car

Car insurance covers any costs caused by car accidents including car repair and injuries.

 

 

 

7. Pag-IBIG II Savings Program

pagibigPag-IBIG II is a voluntary savings program that gives higher dividends in a short term. It is intended for individuals who are active members of Pag-IBIG I or Pag IBIG Overseas Program.

In this program, the minimum amount of contribution is Php 500 per month for five years.

Monthly Contribution

Total savings after 5 years*

Total savings after 10 years*

P500.00

P34,484.17

P79,553.59

P1,000.00

P68,968.33

P159,107.18

P1,500.00

P103,452.50

P238,660.78

P2,000.00

P137,936.66

P318,214.37

P3,000.00

P206,905.00

P477,321.56

P4,000.00

P275,873.32

P636,428.74

P5,000.00

P344,841.65

P795,535.92

*if the dividend rate is 6%

Members can only withdraw their total accumulated value (TAV) upon reaching the maturity date. However, they can withdraw their TAVs with the following exceptions:

  • they become totally disabled
  • they become mentally incapable
  • they have health issues resulting to service separation
  • death

Benefits:

  • Pag-IBIG II has the highest dividend compared to Pag-IBIG I and Pag-IBIG Overseas Program
  • Tax-free dividends
  • Investments are assured and handled by the government.

8. Social Security System (SSS) Flexi Funds

sssThe SSS Flexi Funds is a voluntary individual account intended for Overseas Filipino workers (OFWs). It is a combination of pension plans and savings accounts. This fund is invested in government securities.

OFWs may join the program by submitting membership applications (SS Form OW-1 or Overseas Worker Record) at any SSS branch nationwide.

 

 

The terms of payment are:

  • Any amount not lower than P200, in excess of the required regular SSS contribution automatically goes to the member’s account and earns interest.
  • No minimum and maximum contribution amounts.
  • Members can make monthly, quarterly, annual, or intermittent contributions.
 

Maximum regular SSS contribution:

P1,760/month
for Y2014

Details of

payment

Applicable period:

January to March 2014
(total of 3 months)

Total amount paid:

P8,280
(or P2,760 x 3)

Posting of payments

Regular Program:

P5,280
(or P1,760 x 3 months)

Flexi-fund Program:

P3,000
(excess amount)

Members can remit contributions by filing SS Form RS-5 (Contributions Payment Return) and indicating the payor type as Overseas Filipino Worker. They can remit at participating branches and authorized agents including:

 aub  commerce  pnb  iremit
Asia United Bank Bank of Commerce  Philippine National Bank  iRemit 
       
 ventaja  lucky money  western-union  
 Ventaja  WDS- Lucky Money Western Union (selected locations)   

 

Contributions may be paid as follows:

  • January to December – anytime within the same year
  • October to December – on or before January 31 of the next year

Claims come in the form of:

  • Monthly pension
  • Lump sum payment
  • Combination of both

Benefits

  • Contributions are primarily invested in government securities.
  • Investments are transparent and risk-free because the government handles contributions.
  • Computations of interest rates can be based on SSS’ short-term placements or the average Treasury bill rate, depending on which one is higher.
  • Early withdrawal

Members whose overseas employments have ended may continue to contribute in Flexi Fund Savings as long as they make maximum contributions regularly.

Sources: Philippine Stocks Exchange, Cooperatives Development Authority, Social Security System, Insurance Commission, Pag-IBIG Fund, Philippine Life Insurance Association Inc., Money Gurado, Stock Markets for Pinoys, Investing in Bonds and other investment-related websites