Financial Blog

Investing is not exactly easy to get into, as a lot of people might think. Aside from the fact that it’s a challenge to search for the perfect investment vehicle where you can put your hard-earned money, one of the first things that come into mind when thinking of investing is how much money you need to set aside to start.

Luckily, there is what we call a Unit Investment Trust Fund, or UITF, that makes it affordable for everyone to get access to financial instruments that are not readily available to retail investors.

What are Unit Investment Trust Funds?

A Unit Investment Trust Fund, or UITF, is a collective investment scheme wherein money from various investors is pooled to collect a large fund enough to invest in multiple and diversified stocks and/or bonds among other asset classes which would otherwise be costly if invested in separately. Each UITF intends to achieve a specific goal. Investors can choose the type of UITF they want to invest in based on his/her own financial goal.

How do UITFs Work?

The keyword here is collective investment scheme or pooled funds. You are probably more familiar with the traditional idea of investing where one investor puts money in a certain investment such as common stock, manages it either by buying or selling shares of this stock in the market. However, what most people are not aware of is that you cannot just buy whatever number of shares you want of that particular stock. This is where the concept of Minimum Board Lot comes in, which exchanges usually implement.

The Minimum Board Lot refers to the minimum number of shares required to be purchased in a single transaction. To better illustrate, let’s imagine that you have Php1,000 and you want to invest in the stocks of Company A. Looking at the price per share, you found out that the cost of one share is just Php 25. Aside from that, upon checking the company’s performance, you found out that the performance of the company for the last three years was good. Sounds like a bargain, right? Tough luck, Company A may have shares that are within your current budget, but what you did not take into account is that you have to purchase shares of Company A at its minimum board lot of 100. This means that investing in common stocks of Company A will cost you Php2,500 at the minimum, excluding all other fees attached to the transaction! What if you are interested in more than one company? Then you will have to spend more than what you can currently afford.

When investing in a pooled fund, you will be able to indirectly invest in stocks of different companies without having to worry about the minimum board lot. Think of it as various people combining their funds to be able to invest in multiple companies. This makes it easier and more affordable for people to invest.

Who Manages the Funds?

One advantage of investing in UITFs is that they are managed by professional and experienced fund managers. It is one of the key factors why people tend to gravitate towards this type of fund. Fund managers handle the investments for you. They are equipped with expert knowledge and strategies that aim to align the performance of the funds with your financial goals. Fund managers monitor the market for potential opportunities and manage risks to be able to optimize the performance of the funds.

Is there a difference between Mutual Funds and Unit Investment Trust Funds?

Both mutual funds and UITFs are collective investment schemes or pooled funds. One difference is who offers them. Mutual Funds are offered by individual/investment companies that are regulated by the Securities and Exchange Commission. Unit Investment Trust Funds, on the other hand, are offered by banks and are regulated by the Bangko Sentral ng Pilipinas. For a more detailed explanation of the differences and similarities, you can read more about it here. 

How do you Make Money in UITFs?

An investor makes money in UITFs through the increase in share prices of the companies invested in. The prices of the securities in the fund are updated daily based on current market rates. In addition, the fund may also make money from regular cash flows into the account from dividends or coupons paid. These comprise the fund’s price known as Net Asset Value per Unit (NAVPU).

Net Asset Value or NAV is calculated by getting the sum of the market value of all assets in the fund minus liabilities or expenses. NAVPU will then be calculated by dividing the NAV by the total units of participation.

NAVPU= (Total Assets – Total Liabilities) / Number of Outstanding Units

How does NAVPU work? Let’s say you plan to invest Php 2,000 and the NAVPU for the UITF is Php20. That means you will be able to buy 100 units of the fund. Over time, depending on the market, the unit price may either rise or fall. Let’s say the fund did well the next day and the NAVPU rose to Php 22. That means your total investment will be worth Php 2,200, an increase of Php 200 from your original investment. On the other side, let’s say the prices of some securities in the fund decreased, causing the NAVPU to drop to Php19. This means that your total investment will be worth Php 1,900.

What are the advantages of investing in UITFs?

Pros 

• Low buyer entry compared to other investments
• Diversification and Risk Management 
• Less Management needed on the side of the individual investor. 

What are the Different kinds of Funds?

Before you decide to invest, you should know that there is more than one kind of fund available in the market that poses different potential earning levels and risk levels.

Index Funds – These track the Indices. Usually, in foreign markets, there are multiple indices (e.g Dow Jones, Russel 2000, among others) however, in the Philippines we only have one present, the Philippine Stock exchange index (PSEi). These funds are generally passive with little active management done on the side of the fund managers due to these mostly focusing on tracking the index performance.

• Recommended Investment Horizon: 1-3 Years

• Recommended for Aggressive investors

Equity Funds – These funds invest in stocks of individual companies. In Equity funds, unlike in Index Funds, fund managers actively manage these and generally try to compete with the index (which focuses more on tracking). 

• Recommended Investment Horizon: 1-3 Years

• Recommended for Aggressive investors

Bond Funds – These are invested in different Bonds. Bonds are generally less risky investments compared to stocks but with higher earnings. However, compared to stocks, the minimum investments for these are generally more expensive and, as a result, harder to enter. 

• Recommended Investment Horizon: At Least 1 Year

• Recommended for Moderate Investors

Money Market Funds – Low risk. These are invested in Cash deposits, Time Deposits, Bank Deposits, Securities, and other relatively safe investments. Compared to other funds, these are relatively short-term, low-risk investments. 

• Recommended Investment Horizon: 6 Months – 1 Year

• Recommended for Moderately Conservative 

Feeder Funds – These are funds that invest in other funds, usually foreign ones. Remember that there are a lot of investments in foreign markets, oftentimes extremely profitable. However entering these markets are not exactly easy, hence feeder funds make it easier for investors to diversify their investments in the foreign market. 

• Recommended Investment Horizon: At least 3 years

• Recommended for Aggressive Investors

Balanced Funds – The objective of Balanced Funds is to provide its investors with capital appreciation over the medium-term through a portfolio mix of equities and fixed-income securities. Fixed-income investments of Balanced Funds should comprise 40% to 60% of the total Fund.

• Recommended Investment Horizon: 1 – 3 Years

• Recommended for Aggressive Investors

Read more about the difference between each fund and their advantages.  

Should you Invest?

Investing is one of the fastest ways to reach our goals by making our money work for us. Ultimately, the decision to pursue or not will depend on each person, after all, we all have our own financial goals and set deadlines to meet them.

If you’re interested in investing in UITFs you can learn more about the details of each fund by visiting our page here.