Investors who want to earn from stocks or bonds may find it difficult to actively trade or monitor the daily values of these securities. To address this problem, investors who don’t have time or expertise may instead choose to put their money in Mutual Funds or Unit Investment Trust Funds (UITFs).
Mutual funds and UITFs are collective investment schemes wherein funds from various investors are pooled together into one fund to achieve a specific investment objective. The funds are then entrusted to a professional investment manager who manages a diversified portfolio that may consist of stocks, bonds, and other investment assets.
The fund makes money from the appreciation in value of the assets owned by the fund and the dividends and interest it receives from the securities held. These incomes are then passed on to the investor less fees and fund expenses.
What are mutual funds?
In the Philippines, mutual funds are open-ended investment companies which means shares can be bought and redeemed at any time. Investors of mutual funds buy “shares,” making them “shareholders” of the investment company. As part-owners, mutual fund investors are entitled to shareholder rights such as the right to vote and the right to receive dividends.
What are UITFs?
UITFs are also open-ended investments schemes but instead of buying “shares,” investors buy “units” of investment. As such, they do not become shareholders of the bank. Their participation is limited only to their share in the incomes or losses of the investment fund.
MUTUAL FUNDS vs UITFs
Mutual funds and Unit Investment Trust Funds are similar in nature but differ in a few aspects. The two are both collective investment programs, but mutual funds are offered to the public by investment companies, while UITFs are product offerings of banks.
Mutual funds and UITFs both use marked-to-market valuation, wherein the investment portfolio is valued using the market prices of each asset owned. Using marked-to-market valuation, the price of each unit of UITF (called Net Asset Value per Unit or NAVPU) or the price of each share of mutual fund (called Net Asset Value per Share or NAVPS) can be determined. The formula to compute these prices is Net Asset Value, or the market prices of assets less liabilities, divided by total outstanding units or shares of the fund.
In terms of regulation, mutual funds are governed by Republic Act No. 2629 (RA 2629), also known as the “Investment Company Act” and are regulated by the Securities and Exchange Commission (SEC). As for UITFs, the Bangko Sentral ng Pilipinas (BSP) regulates them since these are bank products.
Both mutual funds and UITFs are not covered by the Philippine Deposit Insurance Corporation (PDIC).
Investing in Mutual Funds & UITFs
These two collective investment schemes provide good investment opportunities because of the following features.
Professional Management. Investors are not anymore burdened with issues such as asset selection and monitoring because the funds are entrusted to and managed by a full-time professional fund manager who makes investment decisions.
Diversification. Combining various assets in a portfolio offers investors higher returns because risks are spread out and the negative performance of one asset may be compensated by the positive performance of another. Since mutual funds and UITFs have large asset bases, these funds can invest in assets that may not normally be accessible to individual investors. This can increase the profit potential and also lower the investors’ risk.
Economies of Scale. Individual investors who purchase and trade several assets incur large amount of fees. In mutual funds and UITFs, these costs are shared among all investors, drastically reducing the individual’s costs of transaction.
Liquidity. Shares of mutual funds and units of UITFs are highly liquid, meaning they can easily be bought from and sold to the fund at any time.
Low Minimum Investment. In the Philippines, a mutual fund can be purchased for as low as P5,000 per share while investors can invest in UITFs for as low as P10,000 per unit.
Of course like any other investment asset, mutual funds and UITFs also have drawbacks and risks.
Investment Risk. Returns in mutual funds and UITFs are not guaranteed and the possibility of loss may be expected. The value of the fund is dependent on the value of the assets in the portfolio and some assets may underperform and generate losses for the fund.
Overdiversification. In the process of investing in a variety of assets, some funds tend to overdiversify, wherein the fund acquires many assets that are highly related, reducing the benefits of diversification.
Costs and Fees. Mutual funds and UITFs charge several costs and fees that eat into the individual investor’s profit. These include the annual management fee, which represents the compensation of the fund manager, and other administration and investor relations expenses. Most mutual funds also charge a fee to enter the fund (called “entry sales load” or “entry fee”) or exit the fund (called “exit fee” or “redemption fee”). UITFs usually do not have entry fees but may charge an early withdrawal fee if the units are withdrawn within a certain period.
Types of Mutual Funds & UITFs
There are four (4) types of mutual funds and UITFs in the Philippines.
- Equity or Stock Funds
These funds invest primarily in the shares of publicly-listed corporations. The fund objective is capital appreciation or long-term capital growth.
- Bond Funds
Bond funds invest primarily in fixed-income securities issued by the government or large corporations. Examples of fixed-income securities include bonds, Treasury bills, and Treasury notes. The objective of the fund is to provide current income that is consistent with preservation of capital and liquidity.
- Balanced Funds
Balanced funds invest in a mixture of equities and fixed-income securities. The goal is to provide total return consisting of a high level of income that is consistent with preservation of capital, liquidity, and long-term capital appreciation.
- Money Market Funds
Among the four types of mutual funds in the country, money market funds provide the least amount of risk. Its goal is to provide current income by investing in short-term securities with portfolio duration of one year or less. These may include short-term government securities, special deposit arrangements, and time deposits, among others.