Mutual Funds And UITFs: Investing For Beginners

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investing for beginners

“Sabi sakin ng kaibigan ko bili tayo ng ganitong investment! Mabilis ang return!” is a phrase Floi Wycoco, founder of The Global Filipino Investors (TGFI) group, commonly hears. Based from his experiences talking with fellow kababayans, some Filipinos jump right into investing without educating themselves first. Everyone wants to make a quick buck without putting in the effort, but if that were possible, then everyone would be rich. Investing is no different, and there are two options you can choose from:

  • Earn in a short amount of time BUT with a lot of effort (e.g. day trading)
  • Earn in a longer amount of time BUT with less effort

For the first option, you need to put in the effort of learning. You can’t buy ‘this’ stock because someone you know told you to. You need to know why you’re buying a particular option. This requires looking at a company’s financial statements and being up to date with current events, as well as educating yourself about the basics of stock trading. Not every beginner has time for this.

For the second option, mutual funds and Unit Investment Trust Funds (UITFs) are your friends and are perfect for beginners.

Why are they perfect for beginners?

Mutual funds and UITFs are handled by professionals who do the work for you. They ensure maximizing your gains whilst minimizing risks. All you have to do as an investor is to put in the money. Because of this, mutual funds and UITFs are subject to management fees.

To get the most out of your investment, you need to leave it for at least 10 years. As mentioned earlier, it’s either you earn in a short time with a lot of effort or wait for a long time, but with less effort.

How do mutual funds and UITFs work?

Mutual funds and UITFs work similarly. They’re both a pool of investments where each fund contains different holdings as compared to stocks. If you buy an equity-based mutual fund or UITF, your holdings may include PLDT and Ayala Land, Inc. If you did stock trading and wanted to invest in those companies, you would have to buy them individually, which can cost a lot of money.

The main difference between mutual funds and UITFs is that you buy shares with the former and units with the latter. Buying shares of a mutual fund makes you a shareholder of the investment company because you are buying part of the company, but buying units of UITFs does not.

Since you buy shares with mutual funds, prices are expressed in Net Asset Value Per Share (NAVPS). If one share of Fund X costs Php 1.00, and you want to buy 5,000 shares, you need to put Php 5,000 into the mutual fund. If after a year, the price of one share of Fund X has gone up to Php 2.00, then your 5,000 shares are now worth Php 10,000 from Php 5,000. This is how you make money with mutual funds.

For UITFs, you earn money in the same way but since you are buying units of a fund, the price is expressed in Net Asset Value Per Unit, or NAVPU, instead of NAVPS.

What’s the difference between mutual funds and UITFs?

Aside from the terms (NAVPS vs NAVPU) used to express the price of a mutual fund share and a UITF unit, the two differ in other ways as well. See the table below for more differences between the two:

  Mutual Funds UITFs
What are they? pool of investments where you buy shares of the investment company pool of investments where you buy units of an investment fund
Where can I buy them? brokerage firms, insurance providers banks
Who handles them? fund managers of the company Trust Group of the bank
How much do I need to start? Php 5,000 Php 10,000
Do I have shareholder rights? Yes No
Who is responsible for regulating these? Securities and Exchange Commission (SEC) Bangko Sentral ng Pilipinas (BSP)

How much can you earn investing in these?

The return on investment (ROI) varies depending on the price of a fund. If you buy a share or a unit at Php 100 today, and it grows to Php 110 in a year, then you earn a 10% ROI for that year. The return on mutual funds and UITFs is less than the potential ROI on stocks, but much better than the interest rate of savings accounts at 0.25%. See the table below to see the ROI of the five best performing mutual funds and UITFs over the last five years:

Mutual Fund (June 18, 2010-2015)

ROI

UITFs (July 7, 2010-2015)

ROI

Philequity Fund 19.96% UCPB Equity Fund 142.00%
Philippine Stock Index Fund 18.78% BDO Institutional Equity Fund 129.00%
Philequity PSE Index Fund 18.56% SB Peso Equity Fund 126.00%
First Metro Save and Learn Equity Fund 17.78% BDO Equity Fund 126.00%
Sun Life Prosperity Philippine Equity Fund 15.78% AB Capital Equity Fund       124.00%

What are the disadvantages of mutual funds and UITFs?

Mutual funds and UITFs are ideal for beginners because they are handled by professionals; however, because of this, the investments are subject to management fees of up to 1.50%, which can be higher than the fees involved with direct stock trading. Also, unlike savings accounts, these investments are not insured and returns are not guaranteed. You can experience losses from time to time.

This is the importance of having a long-term investing mindset. By holding your money for a longer period, you’ll avoid losses by giving your investments more time to increase in value and give you larger gains.

These disadvantages are the trade-offs for the ease, convenience, and performance of mutual funds and UITFs compared to other investment vehicles. The final decision is up to you – are you ready to invest?

You can start now!

With mutual funds and UITFs, you can make your money work for you. You don’t need to track the market on a daily basis since an expert handles it. Now that you know the basics on mutual funds and UITFs, you can start investing today.

As Lianne Laroya, a Registered Financial Planner and founder of The Wise Living, advocates on her blog, “Invest NOW. Compound interest working for you for a very long time is your best friend. Later you will see that when you start investing early, you will be able to get a huge amount of money just by investing a little amount.”. To start today, go to your chosen bank or financial institution and ask about their investment options available for you.