UITF (Part 3): The Disadvantages of UITF

July 12, 2013 | Posted by: Moneymax | Personal Finance

July 12, 2013

Previously, we have discussed the advantages as well as the benefits of UITF products that an investor can avail of. However, nothing is perfect, and undeniably, there are several disadvantages of the UITF investment that we must be aware of.
Read More: 6 Things to Consider Before You Make an Investment

Every Extremity Is a Fault: Over-Diversification

As we have mentioned before, diversification of investments can mitigate the negative effects from single investments to the overall financial health of a UITF portfolio. However, over-diversification may backfire and brings out negative consequence.

How does over-diversification happen? It occurs when the number of investments made by the fund managers reaches a level where additional investment not only lower the risk of capital loss and reduce the volatility, but also decrease the potential return.

According to Warren Buffett, wide diversification is only required when investors do not understand what they are doing. In other words, over-diversification might minimize your loss but at the same time reduce your potential return.

The Harms Done By Over Diversification

By having too many stocks, bonds or investments in a UITF portfolio, the earning gained from a profitable investment may be offset by money loss in more than one asset or investment, and subsequently we are deprived from the gains from the profitable investments. In some cases this makes it nearly impossible for the fund to beat their benchmark indexes.

Please bear in mind the reason we are paying the management fee on a regular basis. The management fee varies depending on the type of fund, and covers the costs of marketing, investment research, management and routine administrative expenses of the trustee. It’s not only about reaching the benchmark indexes, but to outperform the benchmark indexes and give us decent rewards in return. After all, the primary reason we invest in UITF instead of regular deposit accounts is to make the most out of our hard-earned money.

Where UITF Goes

If we wish to know where our money in the fund is invested, we can review the list of investment outlets which is updated quarterly. The type of investments made by the trustee from bank to bank varies according to the investment parameters stated in the UITF Plan Rules. However, since UITF is regulated by Bangko Sentral ng Pilipinas (BSP), UITF fund investments shall be limited to the following:

  • Bank deposits
  • Tradable securities issued by the government of a foreign country, any political subdivision of a foreign country or any supranational entity (i.e. IMF, ADB)
  • Exchange-listed securities
  • Marketable instruments that are traded in an organized exchange
  • Loans traded in an organized market
  • Any other tradeable investments that the BSP allows

The same knife cuts the bread and the finger. One of the biggest advantages of a UITF is its diversified portfolio which minimizes the potential risk and lowers the price volatility. However, a diversified portfolio may have inherent risk attached to it, and over-diversification may overturn the boat which is loaded with our hard-earned money.
Choose wisely and rationally regarding the type of UITF you are investing in according to your own investment objectives, risk profile as well as investment duration. In the next article, the risks of UITF will be dealt with.

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