Unit Investment Trust Funds: How They Work

A Unit Investment Trust Fund (UITF) is an open-ended pooled trust fund that allows investors with similar investment objectives to pool their money into one fund, which is then managed by professionals. The pooled funds are invested in various types of securities, such as stocks, bonds, and other financial instruments, with the aim of maximizing returns within reasonable risk levels. UITFs are typically considered medium to long-term investments and are not suitable for those who need immediate access to their funds. They are also not deposit products and are not insured or guaranteed by financial institutions, meaning that there is a risk of losing money. By investing in a UITF, individuals can benefit from diversification, professional fund management, and the potential for higher returns compared to traditional savings accounts.

How to invest in a Unit Investment Trust Fund (UITF)

A Unit Investment Trust Fund (UITF) is an open-ended pooled trust fund denominated in pesos or any acceptable currency. It is operated and administered by a trust entity and made available by participation. Each UITF product is governed by a Declaration of Trust (or Plan Rules) which contains the investment objectives of the UITF, as well as the mechanics for investing, operating and administering the fund.

• Understand the different types of UITFs available: UITFs can be classified according to their investment objectives, types of assets invested, portfolio mix, minimum investment amount, minimum holding period, potential benefits and risks, settlement period and charges. The most common types of UITFs include Money Market Funds, Bond Funds, Balanced Funds and Equity Funds.
• Determine your investment capacity and risk appetite: Before investing in a UITF, it is important to assess your financial resources, investment horizon, risk tolerance and investment objectives. UITFs are considered medium to long-term investments, so it is important to ensure that you have the financial capacity to stay invested for a reasonable period of time.
• Choose a UITF product that aligns with your investment goals and risk profile: When selecting a UITF, it is crucial to consider your investment capacity, investment horizon, risk profile and investment objectives. Compare different UITF products offered by various financial institutions to find one that best suits your needs.
• Review the Declaration of Trust or Plan Rules: Each UITF is governed by a specific Declaration of Trust or Plan Rules that outlines the investment objectives, mechanics, and other relevant information. Make sure to carefully review this document before making any investment decisions.
• Purchase units of participation in the UITF: To invest in a UITF, you need to purchase units of participation, which represent your proportionate share in the total value of the fund. The price of these units is based on the Net Asset Value Per Unit (NAVPU) of the fund, which is derived by dividing the fund's Net Asset Value (NAV) by the number of outstanding units.
• Enroll and make your investment: Once you have selected a UITF that aligns with your investment goals and risk profile, you can enroll and make your initial investment. The minimum investment amount can vary depending on the UITF, but some funds allow you to start with as little as PHP5,000.
• Monitor the performance of your investment: After investing in a UITF, it is important to regularly monitor its performance. You can do this by tracking the NAVPU of the fund, which is generally available on a daily basis. This will help you understand the value of your investment and make informed decisions about buying or redeeming units.
• Redeem your units when needed: UITFs are open-ended, which means you can redeem your investment at any time, subject to the guidelines set forth in the UITF Declaration of Trust. However, keep in mind that there may be additional charges for early withdrawal if you redeem your investment before completing the minimum holding period.

Differences between UITFs and other investment funds

Unit Investment Trust Funds (UITFs) are similar to mutual funds in that they are both open-ended pooled funds, which are managed by professional fund managers. Both UITFs and mutual funds are invested in a diversified basket of stocks, bonds, or other securities. However, there are several differences between UITFs and other investment funds, such as mutual funds.

Firstly, investing in a UITF buys you units in the fund, whereas investing in a mutual fund buys you shares. This means that investors who own shares in mutual funds become shareholders and part-owners of the fund, unlike UITF investors who purchase units as part of their participation.

Secondly, UITFs are offered by banks with trust licenses and trust corporations, and are governed by the Banko Sentral ng Pilipinas (BSP). Mutual funds, on the other hand, are governed by the Securities and Exchange Commission (SEC).

Thirdly, UITFs have a stated expiration date based on the investments held in its portfolio. When the portfolio terminates, investors receive their share of the UIT's net assets. In contrast, mutual funds do not have a specified expiration date, and they are actively traded, meaning securities can be bought or sold.

Additionally, UITFs are not actively traded, and securities are usually only bought or sold if there is a change in the underlying investment, such as a corporate merger or bankruptcy. Mutual funds, on the other hand, can be actively traded, and the portfolio manager can buy and sell securities in the portfolio.

Furthermore, UITFs have a fixed portfolio of securities and a set investment strategy, which means their performance is usually more predictable than actively managed funds. Mutual funds, however, may change their holdings and investment strategy over time, giving investors more control over the investments made.

Lastly, UITFs typically do not charge a front-end load, whereas most mutual funds charge a front-end load of up to 2% of the initial investment.

Types of UITF

Unit Investment Trust Funds (UITFs) are classified according to their investment objectives, types of assets, portfolio mix, and potential risks and returns. Here are the four main types of UITFs, listed according to ascending levels of risk, return, and investment time horizon:

Money Market Funds:

These funds primarily invest in short-term, low-risk fixed-income securities, such as deposits and money market instruments, with a portfolio duration of one year or less. They aim for capital preservation and income generation, making them suitable for risk-averse investors seeking safe and liquid investments. While these funds offer modest returns, they typically outperform savings accounts or time deposits.

Bond Funds:

Bond funds invest in portfolios of bonds and other fixed-income securities, with potential durations of up to one, three, five, or more than five years. These funds aim for capital appreciation and higher yields over the intermediate, medium, or long term. They are suitable for investors with a longer investment horizon who can tolerate higher risk and volatility in exchange for potentially higher returns.

Balanced Funds:

Balanced funds aim to provide capital appreciation over the medium term by investing in a mix of equities and fixed-income securities. The fixed-income component typically comprises 40-60% of the fund, with the rest invested in equities to boost potential returns. These funds are suitable for investors who are willing to take on the risk of potential capital losses associated with stock market investments but seek higher yields.

Equity Funds:

Equity funds focus on investing in equities or stock investments, aiming to maximize returns through capital appreciation and dividend earnings. However, this potential for higher returns comes with a higher risk of losses, both in income and principal. Clients investing in equity funds should be aware of the volatility and be prepared to accept these risks. A long investment time horizon is recommended for this type of fund.

Benefits of investing in a UITF

Unit Investment Trust Funds (UITFs) are a great way to invest your money, offering a range of benefits to suit different investor needs. Here are some of the key advantages of investing in a UITF:

Diversification

One of the main benefits of UITFs is diversification. By pooling your funds with other investors, UITFs allow you to spread your investments across a wide range of financial instruments, including money market securities, bonds, and equities. This diversification reduces risk and ensures your portfolio is well-balanced.

Liquidity

UITFs offer flexibility by allowing you to redeem your units at any time. While it is recommended to stick to your investment time horizon, UITFs provide the option to withdraw your funds when needed. This feature makes them a more liquid investment option.

Affordability

UITFs are known for their low minimum investment requirements, making them accessible to a wider range of investors. You can start investing with a small amount and add more funds over time, making it a cost-effective way to build your investment portfolio.

Better Earnings Potential

UITFs offer the potential for higher returns compared to traditional savings accounts or deposit options. By pooling funds, UITFs can take advantage of economies of scale and provide access to financial instruments typically available only to large investors. This structure enables you to achieve greater earnings without having to invest a significant sum of money.

Professional Fund Management

When investing in a UITF, you gain access to a team of experienced fund managers, traders, and researchers. These professionals actively monitor the markets, make informed investment decisions, and manage risks on your behalf. Their expertise and insights can enhance your investment returns while minimizing risks.

Transparency and Regulation

UITFs are highly regulated and transparent investment products. The Bangko Sentral ng Pilipinas (BSP) governs the management and administration of UITFs, ensuring compliance with regulations. Additionally, trust entities are required to publish UITF prices and Net Asset Values (NAVs) at least weekly, enabling investors to easily compare the performance of different fund managers.

These benefits make UITFs an attractive investment option, providing investors with a well-regulated, transparent, and diversified way to grow their wealth.

Risks of investing in a UITF

Unit Investment Trust Funds (UITFs) are a great way to invest your money, but they do come with certain risks that you should be aware of. Here are some of the key risks associated with investing in UITFs:

• Price Risk: This is common in bonds and equities, which are vulnerable to changes in market prices. An investor may face losses if market prices go down.
• Interest Rate Risk: This refers to the potential losses caused by fluctuating interest rates.
• Liquidity Risk: This risk arises when investors are unable to sell or convert their assets into cash quickly, or if conversion to cash is possible but would result in a loss.
• Credit Risk: This is the risk of losing money when a borrower fails to repay the interest or principal of securities issued.
• No Guaranteed Returns: UITFs do not guarantee any rate of return on investments, and there is always a risk of loss.
• No Insurance: Investments in UITFs are not insured by the Philippine Deposit Insurance Corporation (PDIC).
• Limited Control: Investors cannot control where their money is invested in a UITF, as this is decided by the fund manager.
• Market Volatility: UITFs are subject to market volatility, and the value of the fund may fluctuate.
• Risk of Loss: In the event of losses, the UITF investor bears the risk.
• Long-Term Investment: UITFs are typically medium to long-term investments, and early withdrawal may result in additional charges or losses.

It is important for investors to carefully consider these risks before investing in UITFs and to ensure that they understand the terms and conditions, investment objectives, and potential risks associated with the specific UITF product they are considering.

Frequently asked questions