Thursday, April 18, 2013

How UITFs Work


Dear Investor Juan,

patulong naman, nagugugluhan kasi po ako kung bakit sa mga comments nyo sa UITF's particularly equity funds na bakit na tratrade nila yung units nila?dba passive to?nag iinvest ka lang tapos ang mga profesionals na ang bahala mag laro sa money mo? 


Dear Anonymous,

Thanks for your question. Let me start by briefly explaining how UITFs work.

The trust/asset management arm of a bank creates a fund with a pre-defined objective, which mostly depends on what kind of fund it is: equity, bond, money market, etc. This objective limits the kinds of assets the fund manager can invest in.

At the start, the fund is divided into a certain number of units at an arbitrary initial price: say, 1 million units at 1 peso each. The bank then sells these units to investors like you and I; using our example, by selling all 1 million units of the fund at 1 peso each, the bank collects 1 million pesos. These funds are not owned by the bank or its asset management department, but rather just held by it "in trust"--basically for management and safekeeping on our behalf as investors. The fund manager then invests our money in assets that meet the constraints defined by the fund objective, while trying to make decisions that are good for us at the same time. These decisions include buying and selling assets like stocks and bonds at any given time. For this service, the bank charges a certain percentage of the fund that is called the management or trust fee.

So depending on how well the fund manager's decisions turn out, the total value of the fund may go up or down at any given day. The fund's per unit price--its net asset value per unit or NAVPU-- is just the fund's total value minus all expenses (including the management fee and taxes) divided by the total number of units, so that may also go up or down. Since Philippine UITFs are a form of "open ended" fund, the bank may sell more units to other investors at the current NAVPU: while the total fund value will go up because of this, the number of units would increase in such a way that the NAVPU would remain the same.

So in the world of UITFs, there really are two kinds of investors. The first is the fund manager, who we entrust with our money, who we assume knows what he is doing and will do things with our interest in mind. The second type is us UITF investors. The same way our fund manager make buy and sell decisions depending on how prices go up and down, you and I can also buy and sell UITFs depending on how NAVPUs go up and down.

So yeah, the fund manager gets to play with our money. And we can play with our money, too, if we so choose. Or not, it's all up to you and I. :)

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