UITF (Part 4): The Risks of UITF

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

July 12, 2013

As we have mentioned before, Unit Investment Trust Fund (UITF) products are subject to the marked-to-market valuation method, thus the Net Asset Value Per Unit (NAVPU) varies depending on the values of the assets within the UITF products. Since UITF is not deposit accounts, it is not covered by the Philippine Deposit Insurance Corporation (PDIC). In other words, investors are exposed to the risks of losing a portion or all of their money if the NAVPU at the time of redemption is lower than the NAVPU at the contribution date.

No Guaranteed Rate of Return

There’s no guaranteed rate of return for UITF products. We can only tell about the competency and expertise of the trustee by the historical performance of the fund but it is neither a guarantee nor an indication of the future performance. The higher the risk we are willing to take, the higher is the returning rewards. However, we should have a better insight about the types of risks attached to the UITF investment.

Interest Rate Risk

Interest rate risk exists in an interest-bearing asset due to the changes in interest rate of the asset. When the interest rate increases, the value of the asset decreases and vice versa.
As UITF is subjected to marked-to-market valuation, the investors may experience losses when the increase in interest rate results in a drop of the value of fixed income investment such as bonds and stocks within the UITF portfolio.

UITF Market/Price Risk

Market risk is the risk that the value of an investment within the UITF portfolio will decrease due to changes in market factors such as economic changes, natural disasters, political events, terrorist attacks and changes in interest rate.
The NAVPU of a UITF portfolio may increase or decrease based on the exposure of securities held within the portfolio to the volatility. However, price risk specific to a security can be minimized through diversification of the UITF portfolio.

Liquidity Risk

Liquidity risk is the risk that a security cannot be easily sold at, or close to, its market value. It can be caused by factors such as small or few outstanding units, absence of buyers or limited trading activities.
The risk arises when certain securities within the UITF portfolio are having difficulties being sold at a particular time. It will lead to the consequence that the redemption is halted until the assets within UITF can be converted to cash.

Foreign Exchange Risk

Foreign Exchange Risk is also known as currency risk or exchange risk. It is the risk that an asset/investment denominated in a foreign currency experiences a drop in value due to the fluctuation in foreign exchange rates, which is the exchange rate between the investment’s foreign currency and the investment holder’s domestic currency. The exchange rates depend on a variety of global and local factors such as the interest rates, economic performance, and political developments domestically as well as in foreign countries.
Investors are exposed to the possibilities of losses due to fluctuation in the foreign exchange rates. For example, the securities within a peso-denominated UITF portfolio denominated in another foreign currency. The NAVPU of the UITF decrease when the base currency (peso) of the UITF appreciates or the foreign currency depreciates.
Obviously, UITF are far from risk-free. On the other hand, making an omelette of course requires cracking some eggs. Investing in UITF products is different from gambling. In gambling, you need the lady of luck by your side, but in UITF investment, you have a team of professional and experienced fund managers handling your money (You may wonder at the fees, charges and tax Of UITF). Let’s step out from our comfort zone and take a bold step for a brighter financial future.