Understanding Unit Investment Trust Funds: A Guide To Uitfs

A Unit Investment Trust Fund (UITF) is an open-ended pooled trust fund denominated in pesos or any acceptable currency, which 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) that contains the investment objectives of the UITF, as well as the mechanics for investing, operating, and administering the fund. UITFs are considered medium to long-term investments, and clients must have the financial resources to stay invested for a reasonable period to maximize earning potential.

UITF vs Mutual Funds

Unit Investment Trust Funds (UITFs) and mutual funds are both collective investment schemes that pool funds from various investors to achieve a specific investment objective. They are similar in nature but differ in a few key aspects.

Management and Regulation

Mutual funds are offered to the public by investment companies, while UITFs are product offerings of banks. Mutual funds are handled by investment and insurance companies, which are supervised by the Securities and Exchange Commission (SEC). UITFs, on the other hand, are managed by trust entities, most commonly banks, which are supervised by the Bangko Sentral ng Pilipinas (BSP).

Shares and Units

In mutual funds, investors buy "shares," making them ""shareholders" of the investment company. As part-owners, they are entitled to shareholder rights such as the right to vote and receive dividends. In contrast, UITF investors buy "units" of investment and do not become shareholders of the bank. Their participation is limited to their share in the incomes or losses of the investment fund.

Investment Strategy

Mutual funds are open-ended and actively managed, meaning they can issue new shares and trade securities in the portfolio. In contrast, UITFs have a stated expiration date and are not actively traded, meaning securities are bought and held for the duration of the UITF unless there is a change in the underlying investment. UITFs are bought and sold directly from the issuing company or on the secondary market.

Investor Flexibility

Mutual funds offer more flexibility to investors as they can rotate finances between different funds to rebalance their portfolio over time. UITFs, on the other hand, have a fixed portfolio of securities and a set investment strategy, providing more predictable performance but less flexibility for investors.

Fees and Costs

Both mutual funds and UITFs charge various costs and fees, including management fees and administration expenses. Mutual funds may also charge an entry or exit fee, while UITFs typically do not have entry fees but may charge an early withdrawal fee.

Types of UITFs

A unit investment trust fund (UITF) is a type of investment vehicle that pools money from multiple investors to purchase a fixed portfolio of securities, generally stocks and bonds. The funds are managed by a portfolio manager. UITFs are similar to mutual funds and exchange-traded funds in that they are a basket of investments that pool many investors' contributions into a single vehicle.

Strategy Portfolio

This type of UITF aims to beat a market benchmark and outperform general investments. It uses fundamental analysis to determine what investments may beat the market.

Income Portfolio

This type of UITF focuses on generating dividend income, often at the expense of capital appreciation.

Diversification Portfolio

This type of UITF aims to diversify portfolio assets across a broad range of investments to minimize risk.

Sector-Specific Portfolio

This type of UITF concentrates on a very specific or niche market. While this type of fund can be higher risk, it may also result in higher profits.

Tax-Focused Portfolio

This type of UITF invests in tax-benefit or tax-deferred investments, such as state-exempt or federal-exempt fixed-income securities.

How to Earn from UITF

A Unit Investment Trust Fund (UITF) is a type of investment pool that allows you to invest in a portfolio of securities such as stocks, bonds, or money market instruments. As an investor, you can purchase units in a UITF to invest in your preferred portfolios. The value of each unit is determined by the Net Asset Value per Unit (NAVPU), which is calculated daily based on the fund's assets and liabilities.

• Stock price increase: Your UITF will earn money when the prices of the company shares you've invested in increase. This can happen when many investors are attracted to the company’s prospects, such as business projects and expansions.
• Dividends: A dividend is a sum of money a company gives its shareholders out of its profits. The company can release some of its annual profits to shareholders or invest it back into the business.
• Bonds: If your UITF is invested in bonds, you will profit when the borrower pays interest. Private companies and governments issue bonds as proof of indebtedness.

When investing in a UITF, it is important to consider the different types of funds available, as each has its own risk and return profile. Some funds may be riskier but offer the potential for higher returns, while others may be less risky but provide more modest returns. It is also important to consider the management fees and other charges associated with UITFs, as these can impact your overall earnings.

In addition, UITFs offer diversification benefits by pooling capital from various investors and investing in a variety of assets, which helps spread out risk and reduce the impact of individual asset performance on the overall investment. When investing in UITFs, it is common to undergo a Client Suitability Assessment (CSA) to determine your investment profile and identify which UITFs are suitable for you based on your risk tolerance.

Pros and Cons of Investing in UITF

Pros of Investing in UITF

UITF stands for Unit Investment Trust Fund, a pool of investments funded by various investors. Each UITF is different, with plan rules or a Declaration of Trust that defines the mechanics of investing, managing, and operating the pool of funds. Here are some of the advantages of investing in UITF:

• Easy way to earn passive income: UITF is a great way to generate passive income with a small amount of investment.
• Low investment capital: Some UITFs have a low minimum investment requirement, making them accessible to a wider range of investors.
• Diverse investment options: UITF allows investors to invest in various industries and companies, providing diversification and potentially reducing the risk of losses.
• Professional fund management: Professional fund managers handle and manage the holdings of UITFs, allowing investors to sit back and let their money work for them.
• Potential for higher returns: UITFs provide access to financial instruments not readily available to retail investors, offering the potential for higher returns.
• Liquidity: While it is advisable to invest in UITF for the long term, investors can redeem units of participation at any time, providing liquidity.
• Affordability: UITFs generally have low minimum investment requirements, making them affordable for many investors.
• Better earnings potential: UITFs offer the potential for greater earnings without having to invest large sums of money.
• Exemption from reserve requirements: UITFs are not subject to the same reserve requirements as bank deposits and CTFs.
• Transparency: UITF investors can benefit from transparency as trust entities are required to publish the UITF Net Asset Value Per Unit (NAVPU) at least weekly, allowing for easy comparison of investment performance.
• Regulated product: UITFs are governed and regulated by financial authorities, providing investors with additional protection.

Cons of Investing in UITF

While UITF offers many benefits, there are also some potential drawbacks to consider:

• Variable return on investment: The return on investment in UITF can vary, and there is no guarantee of fixed returns.
• Lack of insurance: In some countries, UITF investments are not guaranteed or insured by deposit insurance corporations, which means there is a risk of loss.
• Limited control: Investors in UITF do not have control over where their money is invested as the fund manager decides which assets to buy.
• Limited shareholder rights: Units in UITF do not give shareholders the same rights as they would have by investing directly in stocks.
• Risk of loss: UITF investments carry several risks, including price risk, interest rate risk, liquidity risk, and credit risk.
• Long-term investment: UITF is typically designed as a medium to long-term investment, so it may not be suitable for those seeking short-term investments or needing quick access to their funds.
• Fees and charges: There are various fees and charges associated with UITF investments, such as service fees, sales charges, withholding taxes, and exit fees, which can impact the overall returns.
• Limited information: In some cases, UITFs may not provide as much information about their investment strategy, performance, fees, or future plans as other types of investments.

Risks of Investing in UITF

Unit Investment Trust Funds (UITFs) are a type of investment that pools money from multiple investors to purchase a fixed portfolio of securities, such as stocks or bonds. While UITFs offer many benefits, they also come with several risks that investors 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 affected by current market prices. Investors may face losses if market prices decline.
• Interest Rate Risk: This refers to the potential losses caused by fluctuating interest rates.
• Liquidity Risk: This risk arises when assets cannot be easily sold or converted into cash, potentially leading to challenges in meeting financial obligations.
• Credit Risk: Credit risk occurs when a borrower fails to repay the interest or principal of securities issued, resulting in losses for investors.
• Market Risk: As the assets of a UITF are valued based on prevailing market prices, investments may fluctuate. There are no guarantees of principal or income protection, and any losses incurred are borne by the UITF investors.
• Limited Control: Investors in UITFs have limited control over their investments as the fund manager decides which assets to buy and sell. The fixed portfolio and set investment strategy of UITFs can restrict investors' ability to influence the investment decisions.
• Lack of Diversification: While UITFs offer diversification across various industries and companies, they may not provide the same level of diversification as more broadly diversified investments. Some UITFs focus on specific sectors or asset classes, increasing the risk associated with those particular areas.
• Long-Term Holding Periods: UITFs are typically designed for long-term investments, making them unsuitable for investors who may need quick access to their funds. Early withdrawal may also result in penalties or additional fees.
• Limited Information: In some cases, UITFs may not provide sufficient information about their investment strategy, performance, fees, expenses, or future plans. This lack of transparency can make it challenging for investors to make fully informed decisions.
• Fees and Charges: UITFs typically involve various fees and charges, such as management fees, sales charges, withholding taxes, and exit fees. These costs can impact the overall returns and should be carefully considered before investing.

Frequently asked questions