Investing in Mutual Funds and UITFs
Mutual Funds and Unit Investment Trust Funds (UITFs) have become the most popular investments in recent years. In the Philippines, I think this is largely due to the efforts of financial gurus Francisco Colayco (author of the Pera Mo Palaguin Mo - Wealth Within Your Reach books ) and Efren Cruz (author of Pwede Na! The Complete Pinoy Guide books). Here's a primer on what Mutual Funds and UITFS are.
What is an investment fund?
A fund, or an investment fund, is a collection of stocks, bonds, or other securities (a portfolio of investment s) owned by a group of investors and managed by a professional investment company.
What are Mutual Funds and UITFs?
Mutual Funds and UITFs are both investment funds. These funds pool the money of various investors into a single portfolio which are managed by professional investment teams. By pooling funds together, the fund is able to invest in high yield investment products which would have been unavailable to small capital investors. This is what makes Mutual Funds or UITFs attractive. In concept both investment instruments are the same.
Difference between Mutual Funds and UITFs
The following chart (from ING) illustrates the difference between a Mutual Fund and a Unit Investment Trust fund. A mutual fund is managed by an investment company while UITFs are managed by the Trust Department of a bank. A mutual fund is regulated by the Securities and Exchange Commission (SEC) while a UITF is regulated by the Bangko Sentral ng Pilipinas (BSP). Participation in a UITF earns you "units" while participation in a mutual fund earns you "shares". They are called differently but they have the same meaning.
An important thing to note in this chart is that although both investment instruments are not required to keep reserves at BSP, setting up a mutual fund requires an initial paid-up capital of 50 million pesos. This makes mutual funds more attractive because with 50 million pesos in initial capital, the investor is already guaranteed a large pool of funds for investments.
UITFs are fairly young investments. It was only in September 3, 2004 that BSP released Circular No. 447, paving the way for the creation of UITFs. UITFs were created to reform the Fund industry and bring it to global standards. This means using the Market to Market (MTM) valuation method which accounts all gains and losses of the assets of the fund on a daily basis, reflecting the actual net worth of the fund for each trading day. (As opposed to the Accrual method where in gains and losses are only accounted for once they occur.)
Advantages of Investing in Mutual Funds or UITFs
Here are a few reasons why investing in Mutual Funds and UITFS are beneficial:
- Funds are professionally managed. A team of financial experts does the researching and monitoring for you. This is highly beneficial for individual investors who are not financially adept or have little time to monitor their investments. As a trade off, a management fee is taken from the fund usually on a per annum basis. (Management fee rates differ for every fund.)
- Fund portfolios are highly diversied. Diversification reduces the risk of an investment portfolio. (I will explain more on this on a future post about the types of mutual funds and UITFs.)
- Investing in a fund is affordable. With a minimum investment, you allow your investment to potentially earn higher.
- Funds are highly liquid compared to stocks and bonds.
I think the greatest risk involved in investing in Mutual Funds and UITFs is the fact that yield/return and performance are not guaranteed. This means that the fund's value go up and down as the market does. Furthermore, your investment is not insured by the fund manager or the PDIC.
Next week, watch out for my post on the types of Mutual funds and UITFs available and on which investment is best for you. Don't miss the sequel to this entry by subscribing to my email list for free.
2 comments:
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hi! i think Mutual Funds and UITF's are great investment vehicles. The only problem is that you don't really have control over these investments. Once you have bought your shares, all you can do is sit back and cross your fingers hoping that their value go up.
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hi ice_hot!
THanks for your comment. Yes, that's quite true but depending on the type of Mutual Fund or UITF, the fund managers are actually limited to the types of investments that they can invest in. The amount of investment allowed in one single investment is also limited. Watch out for my post next week. ^^ I'll be discussing the types of mutual funds and on which one will be best for you.
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