Decoding The Different Types of Mutual Funds and UITFs

Posted by Fitz Villafuerte under Investing on May 26, 2015

Mutual Funds and Unit Investment Trust Funds are excellent investments primarily because your money gets to be professionally handled by experienced investors.

Moreover, it gives you automatic diversification in your portfolio, which helps you manage the risk of losing money.

There are a few other advantages that comes with investing in pooled funds, but these reasons are usually enough to convince anyone to invest in them.

However, once a person decides that he’s willing to put his money in a mutual fund or UITF, he gets bombarded with a long list of investment funds in the market, and choosing which one to invest in becomes confusing.

Today, we’ll decode these pooled funds, and show you how simple they really are, despite their complex names.


Debt and Equity

Alfred, Benj, and Charles plan to put up a fitness gym. They determined that they’d need half a million as startup capital. However, they can only raise P150,000 each, making them P50,000 short of making their goal.

Fortunately a common friend, Dennis, agreed to lend them that P50,000 at 20% interest, and because they wanted to already start the business, they accepted his offer.

Alfred, Benj, and Charles own the gym – so they have equity over the business. However, the three of them owe a debt of cash to Dennis.

If the business becomes successful, Dennis will earn P1,000 but Alfred, Benj, and Charles will surely make more than that in the long-term.

On the other hand, if the business fails, the three friends would lose money, and after selling the gym equipment they bought, they’d need to pay back the money they owe Dennis, including the 20% interest.

From the worst case to the best case scenario, Dennis will earn a fixed amount of money. But for Alfred, Benj, and Charles, their income is uncertain but unlimited.

This is the difference between debt and equity.


Investment Income

All investments can be divided into three types: debt, equity, or a combination of both.

In debt instruments, you make money from the interest paid by the borrower. The simplest example of this is your savings account.

When you put money in the bank, you’re basically lending money to them. The bank doesn’t just keep your cash in the vault, they use it to make money themselves, and then pay you interest.

In equity investments, you make money from the profits of your own business, which is often called dividends. But also, you can make money from selling your equity.

Imagine that you’re Alfred in our example, and after 5 years of successfully operating the gym, an international company contacted you and said that they’d want to buy the business from you and your friends. I’m sure you won’t just sell it at half a million, but several times more than that.

How about investments that are a combination of both debt and equity?

We’ll talk about this later.


Investment Risks

Investments that earn from interests are debt instruments, and they’re typically low-risk. The income is usually fixed, and you have payment priority in case the business fails.

Aside from savings accounts, other low-risk type of investments are time deposits, and bonds. If you’re not familiar with bonds, they’re basically long-term debts by the government or a company.

For example, when you invest in treasury bills (which is another term for government bonds), you’re simply lending money to the government.

Meanwhile, when you buy long-term commercial papers (which is another term for corporate bonds), then you’re lending money to a business.

Several months ago, San Miguel Corporation was selling corporate bonds. If you were able to buy some, then it means SMC owes you money. They will pay you interest annually, and then return all your money after a few years.


On the other end of the spectrum are equity investments, which are high-risk. The chance of losing money is higher, but your income is unlimited, especially if the business continues to grow year after year.

The most popular type of equity investment is the stock market. That’s why when you buy shares of a company, you actually become part-owner of that business. And the reason why I always recommend buying stocks of a company that you believe in.

I have Jollibee shares because I eat there at least once a week. I have Ayala shares because I love going to their malls. I own SM shares because that’s where I buy my groceries. It makes sense to support your own business, right?

Income from investing in the stock market comes from receiving dividends, and from selling your shares at a higher price. You don’t earn from interest payments because it is not a debt instrument like cash deposits and bonds.



Mutual Funds and UITFs

Managers of these pooled funds invest your money in many places. Where and how much they invest determines what type of fund it is called.

For example, let’s take a look at the description of the BPI Short Term Fund:

The BPI Short Term Fund is a money-market fund that has a diversified portfolio of short term government securities, money market securities, and other highly marketable fixed-income instruments.

Even if you don’t understand the whole definition, I know you get an idea that it’s mostly invested in debt instruments. The terms “government securities” most likely refers to government bonds, and “fixed-income instruments” are most likely high-interest time deposits.

Now how about the Philippine Equity Fund that’s in the list of Sun Life Mutual Funds:

The Philippine Equity fund invests in high-quality listed equities of Philippine entities with a diversified portfolio across sectors and issue sizes to provide moderate portfolio volatility.

This is such a no-brainer, and you don’t even have to read the whole thing. The title alone says it’s an equity fund, which means it is high-risk because it is an equity-type of investment.

Finally, let’s read the description of the BDO Peso Balanced Fund:

The BDO Peso Balanced Fund aims to achieve capital appreciation over the medium-term by investing primarily in equities and to some extent in fixed-income securities.

Did you notice that it has the terms, “equity” and “fixed-income” in the description? This means the fund earns from both debt and equity, and because it says “balanced” then it probably has equal portions of both, which places it somewhere between low and high-risk, or simply – moderate-risk.


Investment Strategy

Pooled funds or specifically, mutual funds and UITFs, offer flexible options that cater to the risk tolerance and financial objectives of every investor.

With so many of them in the market, banks and mutual fund companies decided to use a variety of terms to describe their funds to make them unique, and thus harder to compare with their competitors.

But don’t let this marketing strategy confuse you. Because all these funds, at the most basic level, can simply be divided into three types.

Low-Risk Funds

  • A large portion of the fund is invested in debt instruments
  • Good for short-term financial objectives, and/or capital preservation
  • Usual Keywords: fixed-income, money market, government, bond
  • For conservative investors

High-Risk Funds

  • A large portion of the fund is invested in equities
  • Good for long-term financial objectives, and/or capital growth
  • Usual Keywords: equity, stock market, growth fund
  • For aggressive investors

Moderate-Risk Funds

  • Good portions of the fund are invested in both debt instruments and equities
  • Good for medium-term financial objectives, and/or modest capital growth
  • Usual Keywords: balanced, keywords from both low-risk and high-risk funds
  • For moderately aggressive investors

I hope I was able to help you better understand mutual funds and unit investment trust funds. If you’re unsure what type of fund you are planning to invest in, then just ask the bank officer or investment solicitor to tell you where the funds are invested.

In the end, always remember that it is still your money, so you owe it to yourself to know where it is going.

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Photo credits: didbygraham, ascotpools, athomeinscottsdale and advwench


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4 Responses to “Decoding The Different Types of Mutual Funds and UITFs”

  1. Rodel Saguian says:

    Thank you for this blog. You make investment in mutual funds/uitf understandable to ordinary investor.

  2. Hi Fitz! Hope you can see this comment. I wanna know your advice: We are building a wedding fund are planning to get married in 17 months. Where do you suggest we invest 20k/month? This is super short-term since it’s less than 2 yrs. But at the same time, the amount I think is quite high to be invested in a somewhat stagnant fund like money market etc. Would you agree that putting it in Philequity mutual fund be possibly good or shall we really stick to the ultra conservative ones to be sure?

  3. Fitz says:

    Hi Danielle. It’s better to invest in the conservative ones, because you risk losing some of your money if you invest in a riskier investment.

    The market was on an upward trend January 2014, and now it’s down. Imagine if you invested 17 months ago, and your wedding is just around the corner today. You would have lost money.

    However, it is still your decision. If it’s possible to move your wedding date late 2017 or early 2018, you can put it in a moderate-risk fund.

    Of course, another option is to just plan for a more affordable wedding.

    Congratulations in advance. ๐Ÿ˜€

  4. Ayumi says:

    Hi Fitz. I recently invested in BDO Balanced fund. I noticed that it’s continually going down. Should I be bothered by this? Also, I did a research about the funds performance and right now it’s in -0.9751% while Balanced fund in BPI are in 7.6161% as of July 23,2015. What are your thoughts about this?

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