Monday, February 15, 2010

6 Questions About UITFs Answered


1. What is it?

UITF stands for unit investment trust fund. It is a type of investment where the money of several investors are pooled and invested in an actively managed portfolio of bank deposits, government securities, bonds, stocks, and other marketable instruments that are traded in organized exchanges.

2. How can I make money out of it?

Investors participate by buying "shares" or units of the fund at the current market value called Net Asset Value Per Unit or NAVPU. The NAVPU goes up or down depending on the price movement of the fund's underlying assets, and on the interest and/or dividends earned by the investment. UITF participants earn returns in the form of capital gains as the NAVPU appreciates over time. The NAVPU is recalculated daily.

3. What are the different kinds of UITF?

UITFs may be classified based on composition (fixed income securities or equity) and denomination (Philippine peso or US dollar). Most banks would offer the following common flavors of peso-denominated UITFs:

Money Market Fund
Composition: Special Deposit Accounts (SDAs) and T-bills
Investment horizon: Short term (one-year or less)
Special feature: No minimum holding period

Balanced Fund
Composition: 50% Fixed Income Securities, 50% PSEi stocks
Investment horizon: medium term

Equity Fund
Composition: 80 to 90% PSEi stocks
Investment horizon: long term

4. How much would I need to invest?

UITFs offered by the major banks in the country require a minimum investment of 10,000 to 100,000 pesos, depending on the bank and fund type. Minimum additional investments run from a low of 10,000 pesos to a high of 25,000.

5. What are the advantages of UITFs over other investments.
  • Even the most "safe" UITF, the Money Market Fund, generally outperforms personal savings accounts, time deposits, and even treasury bills consistently. For example, BPI's version, the Short Term Fund, yielded 3.24% to 6.71% per annum in the past four years. Riskier funds can yield significantly higher returns, anywhere from 10% to 40% per year, reflecting the high return potential of the riskier underlying assets (mostly corporate bonds and stocks).
  • UITFs are generally very liquid. Money Market Funds have no minimum holding period, so you can sell your units anytime without incurring any fees. While other types of UITF may feature a minimum holding period (from 30 to 90 days), you can still sell your units before this period expires by paying an early redemption fee of 0.5% to 1%.
  • With some funds requiring only 10,000 pesos, UITFs are affordable. Also, With UITFs you have access to blue chip stocks and other securities that, if considered individually, would require minimum investments that may be beyond your reach.
  • By investing in UITFs, particularly in the Balanced or Equity Fund, you enjoy the risk-reducing benefits of diversification (investing in several assets with the aim of eliminating risk) without the hassle and cost of doing it yourself.
  • You get to benefit from the expertise of a professional fund manager, who balances and reformulates the composition of the funds in reaction to a host of factors that may affect the prices of the underlying assets. Of course other experts and some investing schools of thought question the wisdom of of actively managed portfolios, but I digress..
  • Unlike other "high maintenance" investments that require a sizeable chunk of your time and attention, UITFs are generally passive. I mean, after buying several hundred units, the next big decision you'll have to make is when to redeem your investment. Remember, NAVPUs are recomputed once a day, so there won't be intraday fluctuations to stare at all day and get anxious over.
6. Don't tell me UITFs are perfect. There must be one or two disadvantages, aren't there?

Of course there are. Two come to mind, actually.
  • In order to become successful investor, you'll have to live by this universal credo: there's no such thing as a free lunch. All the benefits of UITFs discussed above come at a price: UITF management fees amount to 0.75% to 2% of your investment per year, again depending on the bank and fund type.
  • Unlike personal savings accounts, time deposits, and other bank deposits, which are insured by the Philippine Deposit Insurance Corporation or PDIC, there's a possibility that you'll lose a portion of your investment in UITFs (except probably for the Money Market Fund). So if you're thinking of investing in the risky types of UITFs, be sure to invest only what you can afford to lose.
7. Okay, you have me convinced. Where do I sign up?

I did say I'll only answer six questions, didn't I?

Successful investing involves patience and a bit of hard work; for UITFs, just like any investment vehicle you'll consider, you'll have to do your homework to see the best that the market has to offer. Fortunately, here at Investor Juan we are more than willing to do the dirty work for you.


UITF Triple Threat: BDO vs. BPI vs. Metrobank!
See which one's best for you. Only on Investor Juan.

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