Investing in UITFs: Important considerations you should not miss

In recent years, an increasing number of individuals have turned to Unit Investment Trust Funds (UITFs) as a means of investment. The 2023 Bangko Sentral ng Pilipinas Financial Inclusion survey revealed a notable 12.2% year-on-year rise in the number of UITF participants.

Despite this surge in popularity and the positive economic indicators for investment, there remains a significant gap in financial literacy, as evidenced by the 2023 BSP survey, with only 2% of respondents answering all six financial literacy questions set by the BSP. Against this backdrop, this article aims to educate the significance of pooled investments like UITFs and to shed light on common investment pitfalls associated with them.

What is a UITF?

A Unit Investment Trust Fund (UITF) is a type of pooled fund that allows investors to participate in a portfolio of stocks, bonds, or other securities. UITFs are managed by banks and trust entities, and they operate under the supervision of the Bangko Sentral ng Pilipinas (BSP), the central bank of the Philippines.

What role do UITFs play in a portfolio?

High Net Worth Individuals typically use UITF to invest in a diversified asset class with a management of professional portfolio manager. UITFs have various categories tailored to suit different risk profiles of Investors. Conservative investors may gravitate towards money market funds, comprising short-term money market securities. Moderate risk takers may opt for UITFs comprising government or corporate bonds with tenors exceeding one year, while those seeking aggressive growth may favor equity-based UITFs.

Despite the diversity in asset composition for your UITF investments, there are also benefits from diversification regulations, limiting exposure to a single asset to no more than 15% of the total market value, except in the case of government securities.

Related story: Metrobank UITFs top similar funds of large local banks

What are the risk-return profiles of UITFs? Are UITFs good investments?

The performance of UITFs varies across market conditions. For example, in a time when investors are more risk-averse due to rising interest rates, money market funds typically offer higher potential returns compared to bond or equity funds. Conversely, in risk-on, declining interest rate scenarios, bond and equity funds may outperform.

Notably, equity funds, while offering the highest potential returns, also entail greater losses, with the possibility of incurring over 20% losses during recessionary cycles.

What are the common objectives of UITF?

The objectives and strategy of the UITF is encapsulated in the Key Information and Investment Disclosure Statements (KIIDS), a document that explains the purpose of the fund, the investment strategy, where and in what assets a fund is invested in, management fees, and other pertinent details.

The KIIDS document would state if a person is investing in specific funds, such as money market funds which are aimed at liquidity while providing income higher than time deposits. Meanwhile, bond funds typically have an objective of providing higher return in time deposits and money market funds while having a target portfolio duration.

Meanwhile, equity funds are aimed at maximum growth and provide excess return compared to the benchmark from a portfolio of diversified, blue-chip, and fundamentally sound equities listed at the Philippine Stock Exchange (PSE). Most equity funds typically invest 40%-100% of their funds in equites.

What are the typical costs and fees of UTIFs and how do they affect the overall returns for investors?

There are several do’s and don’ts in UITF that investors should take note of. Among the common missteps investors make when engaging with UITFs is not looking at the KIIDS), which may include fee structure such as trustee fees, custodian fees, external auditor fees, and other charges that constitute the fees deducted from the portfolio value. Trustee fees typically range from 0.50% to 2.00%, based on the UITF type and asset composition.

UITFs with equities typically have higher trust fees which range from 1.00% to 2.00% while UITFs that are only composed of fixed income have trustee fees that range from 0.375% to 1.50%. Although taxes are not shown in the KIIDS, UITFs are not tax-exempt and are subject to appropriate taxes, which have already been deducted when computing the NAVPU.

In conclusion, investors should scrutinize comparable UITF fees and evaluate historical performance against relevant benchmarks, serving as indicators of effective fund management to get the optimal return.

Unlock the potential for growth with Metrobank UITFs. Experience the expertise of professional fund managers who navigate dynamic financial markets to maximize returns for you. Diversify your investments seamlessly across various asset classes, from stocks to bonds, tailored to suit your risk tolerance and financial goals.

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JOSHUA TATLONGHARI is a Financial Markets Analyst at Metrobank’s Institutional Investor Coverage Division. He holds an undergraduate degree in finance from the University of Santo Tomas and is currently taking a Master’s degree in Applied Economics at De La Salle University-Manila. He spends his free time working out and watching documentary videos relating to finance and the economy.