Question: Is it good idea to invest on UITFs? Which bank has competitive rates so far? – Maria Agustin (@pretours) via Twitter

Answer:

UITFs or Unit Investment Trust Funds are pooled funds offered by the trust department of the major banks of the country.

But what is a UITF? As per the Trust Officers Association of the Philippines (TOAP), they defined it at their website (www.uitf.com.ph) as “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) which contains the investment objectives of the UITF as well as the mechanics for investing, operating and administering the fund. Most UITFs are considered medium to long term investments.  Clients considering to invest in UITFs must have the financial resources to stay invested in them for a reasonable period of time in order to maximize earnings potentials.  If the funds to be invested will be needed by the client in the immediate future, the UITFs may not be a suitable investment vehicle for such client.”

A few months ago, I wrote about pooled funds in this column. I mentioned that pooled funds are Pooled funds are investments where people put their money, with an investment manager handling the investments. To explain further, let me use this analogy: Assuming you want to invest but do not know the first thing in investing in stocks or bonds. You can join a “pool” of investors who allow an investment manager to invest for them, subject to the objectives of the fund. Since there are many investors in the fund, the amount generated by the fund becomes sizeable and an investment manager will invest it for you. The investors actually own the funds and the investment manager (usually an institution) simply manages it. Ownership of the fund is through shares, much like owning shares in a corporation. Of course, the investment manager earns from this arrangement through the charging of management fees.

To answer your question if it is a good idea to invest on a UITF, my answer will be “it depends!” Like any investment instrument, you must first ascertain your investment objective, time frame and risk tolerance. UITFs (and Mutual Funds) are not short term investment vehicles. If the purpose of your investment is short term in nature, say less than 3 years then is not a good investment for you because UITFs are marked to market investments. The value of a UITF will be dependent on the performance of the market it is invested in. If the market of the fund you are invested in, say Stock Funds (Equities) are on a rise, expect the value of your UITF to go up, and vice-versa. Pooled funds, of which UITF is one of them, are not bank products and do not carry guarantees. They are not covered by the PDIC as well. However, having a non-guaranteed investment is not necessarily a bad thing because it also means that the yields you can get from investing in them is potentially higher.

If your investment is long term in nature and your risk tolerance is on the moderate to high, UITFs can be a good vehicle for you. Let’s assume that you are investing for retirement, a UITF is a good vehicle to help you build up your retirement funds because the long term nature of your need will allow you to weather the fluctuations in your funds. Even if there is fluctuations or gyrations, investments in UITF (or other pooled funds) are generally on the growth side. Performance is largely dependent on the fund you have chosen to invest in and the rules of risk and return relationship will dictate its performance. Riskier funds like Stock or Equity Funds will generate higher returns than lower risk funds like Bond Funds on good years and of course, expected to have negative growth on bad years. Good years is when the investments environment are doing well like growth in the equities market, bond market and generally when the economy is doing well.

UITFs allows you to invest according to your risk tolerance. Low risks for Bond or Fixed Income Funds, high risk for Stock or Equity Funds and moderate for Balanced Funds which can be a combination of both bonds and stocks. I also like the idea that you don’t need a lot of money to invest on UITFs, most banks will allow you to invest for as low as P10,000.00. BDO even has a program where you can invest as low as P1,000 per month under their Easy Investment Program which is a great idea for many of us. I am sure other banks will come up with a similar program soon.

A big advantage of UITFs is professional investment management. Those entrusted to invest UITFs are well experience full time investment managers who are trained to invest properly, objective and devoid of emotional investing which is a common mistake for newbie investors. Of course, the downside of UITFs is that there is management cost which is only fair. Another problem I see with UITFs is that the branches of the banks are not properly trained in handling inquiries on the UITFs and there have been reports that some branch personnel even discourage their customers from investing in UITFs because of its non-guaranteed nature.

As to which bank is the best performing, you may check out their posted performance in publications and the internet. However, do not look on performance alone. A fund with an aggressive fund manager will do well in good investment markets but will perform poorly on market downs. What you should consider are their long-term performances, like their last 3 or 5 years performance. Lastly, look at their charges too as not all banks offer the same charges.

To learn more about investing, consider attending my Steps to Financial Peace 2012 events on May 18 (V Mall, Green Hills), May 26 (Parklane Hotel, Cebu) and June 2 (Davao). Get in touch with Jen Magalong at 0939-1177856 or [email protected]

“But divide your investments among many places, for you do not know what risks might lie ahead.” – Ecclesiastes 11:2, NLT

 * also appeared in my Inquirer column.