Is investing in UITFs a good idea?

Question: Is it good idea to invest in UITFs? Which bank offers competitive rates?—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 website (www.uitf.com.ph) of the Trust Officers Association of the Philippines (TOAP), it 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), 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 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 about 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 in 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 three years, then it is not a good investment for you because UITFs are market to market investments. The value of a UITF will depend on the performance of the market it is invested in.

If the market of the fund you have invested in, say stock funds (equities), is on a rise, expect the value of your UITF to go up, and vice versa. Pooled funds, of which UITF is one type, are not bank products and do not carry guarantees. They are not covered by the PDIC as well.

However, having a nonguaranteed 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 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 are 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 in good years and, of course, expect to have negative growth in bad years.

UITFs allow you to invest according to your risk tolerance. Low risk for bond or fixed-income funds, high risk for stock or equity funds and moderate for balanced funds, which can be a combination of bonds and stocks.

I also like the idea that you don’t need a lot of money to invest in UITFs. Most banks will allow you to invest for as low as P10,000.

BDO even has a program where you can invest as low as P1,000 per month under its 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 experienced, full-time investment managers who are trained to invest properly.

They are mostly objective and are not prone to emotional investing, which is a common mistake of newbie investors.

Of course, the downside of UITFs is that there is management cost. But this 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 their nonguaranteed nature.

As to which bank is the best-performing, you may check out posted performance in publications and the Internet.

However, do not look at current performance alone. A fund with an aggressive fund manager will do well in good investment markets but will perform poorly when the markets are down. What you should consider are long-term performances, like their last three or five years. Lastly, look at their charges 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, Greenhills), May 26 (Parklane Hotel, Cebu) and June 2 (Davao). Get in touch with Jen Magalong at 09391177856 or [email protected].

Randell Tiongson is an advocate of Life & Personal Finance. He is a director of the Registered Financial Planner Institute (Phils) with 20 years’ experience in the industry. To know more about fixed income, join Chartered Wealth Manager (CWM) program on May 26-July 7. For details, e-mail [email protected].