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 jcignacio.magalong@gmail.com

“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.

How can an investment make it to my list of personal finance champions? Here’s why.

As a personal finance advocate, I and many other advocates have been teaching people on the power of regularly saving and investing. Many of us will use charts and illustrations showing the power of compounding especially if we are doing it on monthly basis. However, there is hardly any vehicle for us to do such investment on a monthly or semi-monthly basis; if there is, the minimum amounts required will marginalize many of us.

I have been writing and speaking about the advantages of pooled funds, especially for long term investing (please check my other blogs on pooled funds). Mutual Funds and UITFs are good investment vehicles for the average Pinoy and one can expect better capital growth in the long term for such instruments. However, Mutual Funds and UITFs have minimum amounts and although they are relatively low, many Pinoys still find it difficult to cough up the initial placement that ranges from P5,000 to P10,000. Further, many of us will start on investing on said pooled funds but will stop making additional placements because we find it inconvenient and we lack the discipline for force savings. To learn more about Pooled Funds visit my previously posted articles: Pooled Funds 1 & Pooled Funds 2

When I received a call from BDO’s Chief Investment Officer Marvin Fausto to have lunch, he said that he has something that he wants to show me that I will definitely find interesting. Since Marvin is a dear friend and one I respect and admire a lot, I agreed to meet him provided he pays for lunch (always a cheapskate I am). Mr. Fausto told me about a new product BDO will be launching, a UITF program that can be deducted from one’s savings account on a monthly or semi-monthly regimen. It was interesting but I didn’t think it was really anything new… besides, there are very few Pinoys who can afford a monthly debit of P10,000. What Marvin said after really caught my attention – he smiled and told me that the monthly deduction can be as low as P1,000 a month and the investor can chose among 3 funds BDO is offering: Bond, Balanced and Equities. My jaw dropped and asked him “really, you guys are willing to let people buy into your funds for P1,000? Wow!” Further, the convenience of auto deduction will be good for many of us who are not necessarily well disciplined in savings.  What I also like is that an investor just needs to go through the initial paperwork one time, no further documents, signatures, Know Your Client (KYC) questionnaires after.

Here’s the beauty of the EIP. If I am a conservative investor, I can opt to go for their Bond funds which are generally low risk investments. If I am aggressive and still have a lot of time before I need my funds, I can opt to be a risk taker and invest in their Equity funds. If I want to be in the middle of the ground when it comes to taking risks, I can opt for Balanced funds. While other banks can offer you UITF funds, I don’t think there is anyone that will let you invest for a small amount of P1,000 per month. Finally, there is a real product that is consistent with what we finance coaches teach, regular savings and investing over a long period of time and this time, even those with challenged incomes can now participate.

Truly, the BDO EIP is a Personal Finance Champion in my view. Pinoys should take advantage of investing through the EIP and other financial institutions should take queue from BDO. To Marvin Fausto, Ador Abrogena, Marily de Vera and the rest of the BDO Trust Department, mabuhay kayo!

Check out BDO’s EIP on their website

Question: I wanted to ask more about pooled funds, specifically equities and balanced funds. I would also like to know if I can invest in these with small amounts on a regular basis.—Val Baguios, International Organization for Migration (IOM) staff

Answer: In my last column, I gave a general introduction of pooled funds, particularly bonds or fixed income funds. I will now discuss other general funds—equities and balance funds.

Equity funds, sometimes referred to as growth funds, are pooled funds invested primarily in equities via the stock market. The bulk of the investments made, say 90 percent, is invested in stocks that are traded by the investment manager. In the Philippines, nearly all of the equity funds are invested in blue chip stocks, or those that are considered premium, seasoned and resilient such as PLDT, Ayala, San Miguel, SM and several banks. The decision on where and when to invest and when to sell is left with the investment manager, who may opt to take a passive approach of buy and hold or an aggressive stance. He may also opt for a combination of the two.

Generally, the objective of an equity fund (also known as stock fund) is long-term growth through appreciation of capital, although dividends may also be an important source of returns. It is believed that the stock market will give the most growth in investment provided there is enough time for stocks to appreciate and that proper trading of stocks are being executed. However, equity funds may also be the most volatile among pooled fund categories, as they mirror the gyration of the stock market.  Equity funds are the most risky among the pooled funds in the Philippines.

The Philippine Stock Market Index or Phisix is the benchmark when it comes to equity funds. I notice that the performance of the equity funds (in UITF and mutual funds) has generally been better than Phisix, that the fund managers are doing a swell job. Equity investing is a good way to hedge against inflation as its potential return should be better than inflation. However, I also have to emphasize that it also offers the most risk.

Balanced funds are funds invested in both equities and fixed income/money market securities. According to Investopedia.com, a balanced fund is “a fund that combines a stock component, a bond component and, sometimes, a money market component, in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate (higher equity component) or conservative (higher fixed-income component) orientation. In other words, balanced funds are combination funds that are designed to generate moderate returns with moderate risks. The funds normally have set limits on investments in asset classes, say a 60-40 mix in favor of fixed-income instruments vs stocks. Some funds have more flexibility …

Complete text found at http://business.inquirer.net/21783/all-about-pooled-funds-part-2