Unit Investment Trust Funds (UITF): Things to Know Before You Invest

If you happen to be a beginner in the field of investing in financial products, it would help you to know that there are three types of institutions in which you can let your money (some people like to call it “wealth”) be managed. I’m assuming here that you would rather have someone manage your money than do it yourself. That is because doing so yourself would require a considerable amount of work. Financial education, most specially with regards to investing, is very critical before engaging in anything that has the potential consequence of putting your financial standing into jeopardy if not done right.

The three financial institutions that have fund managers working on people’s pooled money are the banks, the insurance companies and the mutual fund companies. Of these three, the most familiar are the banks. So I would reserve the remainder of my discussions to what the banks have to offer in terms of financial investment to the public. I would try my best to distinguish it from what the insurance companies and the mutual fund companies have to offer. But I would leave the thorough discussion of these other products to succeeding posts.

Historical Perspective
On September 3, 2004 the Banko Sentral ng Pilipinas (BSP – the central bank regulating all banks in the Philippines) with its Circular 447, gave way to a new kind of financial investment through banks known as Unit Investment Trust Funds (UITF). Although UITFs are fairly young, a similar trust product known as the Common Trust Fund (CTF) has been in the market for more than two decades. The introduction of the UITFs was meant to replace the CTFs to align with international best practices on how investment values are determined.

The BSP defines UITFs as open-ended pooled trust funds denominated in pesos or any acceptable currency, which are operated and administered by a trust entity and made available by participation. What it means to say is that the client has the option (subject to the guidelines of the product) to invest or redeem his or her investments at any time. The trust entity is basically the banks which offer the investment products to their clients. An investor in the fund would not own any specific asset but only units of participation as proportionate share of the fund’s entire asset.

How Do UITFs Work?
Like any other pooled investment funds, such as mutual funds and variable universal life products, the fund managers of UITFs will invest all the money the bank got from investors to financial instruments the fund managers thought were promising but subject to certain criteria set forth by the BSP. Not all UITFs are the same and the basic difference mainly concerns with which financial instruments and by what percentage of each are in them. These financial instruments will come in the form of money market funds, bonds, equities, or a combination of them. It is the job of the fund managers to decide which bonds or equities to invest in so that the income earning and capital gains potential of the whole fund is maximized. 

Of course this professional work does not come free of charge. There are associated management fees that are deducted from the fund as payment to the fund managers. This management fee is the main drawback of pooled fund investments. Robert Kiyosaki argues that for mutual funds with management fees of about 2.5% annually, 80% of the earnings of the fund would be wiped out in the long run. The same could be said of UITFs. But this is the risk one has to be willing to take for the benefit of acquiring a professional fund manager to take care of your investments. Otherwise, you’d want to spend some time studying how they do their job so that you can do it yourself and not have to pay them to do it for you.

There is a minimum investment required to be able to participate in UITF’s as there are in other investments but this limit is not too high to be prohibitive. If you do decide to invest in UITFs, the fund manager will use your and other’s money to buy bonds or stocks or both as investment instruments. As you may know, bonds earn interest while stocks earn dividends. These earnings are added to the fund which is divided into a specific number of units. On top of that, bonds and stocks are valued in accordance with estimated fair market value. This is what’s called the marked-to-market valuation method. 

The total value of the whole fund could change on a daily basis because of marked-to-market valuation method. This value can be expressed by a unit called Net Asset Value Per Unit (NAVPU) which is just an amount calculated from the funds current worth divided by the total units. Once you invest in UITF’s you’ll be given a corresponding number of units which you can then multiply to the current NAVPU to check the amount of your total investment to date. This would give you an idea whether your investment is gaining or heading south.

Compared to other financial investment products, one disadvantage UITFs have is their being subjected to 20% withholding tax on capital gains. There is no such thing for mutual funds or for variable universal life products. This government tax is factored in in the calculation of NAVPU which would partly explain if gains are comparably weaker than other investments.