Mutual Funds and Unit Investment Trust Funds, What's The Difference?
This article is posted under General Information, Investing.
One of the questions I get asked very often is what’s the difference between a mutual fund and a unit investment trust fund or UITF?
I understand the confusion of many for both actually look, work and perform the same way. But there are some key differences that an investor like you should know.
But first let’s discuss the basic similarities between the two.
Both mutual funds and UITFs are pooled investments. This means that the money in them came from thousands of people. This money, which is collected under a company or institution, is then invested in diversified financial instruments such as stocks, bonds, money market and many others.
As an investor of a mutual fund or UITF, you are relieved of the “responsibility” of studying the market, because you have given that duty to the investment company whom you trust will do their best to make your money grow.
Wherever you put your money, it will be exposed to risks and the amount of return is always uncertain in either case. But on the other hand, both mutual funds and UITFs can offer yields greater than cash deposits, thus making them attractive investment instruments.
Now that you know their similarities, what about their differences?
Where to invest
- MF: A mutual fund company. They are sold by licensed mutual fund agents. Here’s a list of Philippine mutual fund companies.
- UTIF: Commercial banks, particularly their trust, investment or treasury department. They are sold by authorized bank employees. Check out the BPI Investment Funds and BDO UITF Products.
Who regulates these companies
- MF: Securities and Exchange Commission (SEC)
- UITF: Bangko Sentral ng Pilipinas (BSP)
What you are buying in a fund
- MF: Common shares in the investment company
- UITF: Units of participation in the fund
The price of the fund is expressed in terms of
- MF: Net Asset Value Per Share (NAVPS)
- UITF: Net Asset Value Per Unit (NAVPU)
Investment fees and their usual range
- MF: sales charge (1% – 5%), redemption fee (0.5% – 3%), investment advisory, distributor and administration fees (1% – 2.5%)
- UITF: sales charge (0% – 2%), redemption fee (1% – 2%), trust fees (1% – 1.5%)
So which one is better? I personally believe neither one can give a higher return than the other. And it’s always best to study the performance of specific funds rather than compare mutual funds and unit investment trust funds in general.
However, here are some general advantages and disadvantages:
Mutual Funds
- Advantages
- Usually has a longer track record
- Has greater regulation for they are required to submit regular reports and are subject to full disclosure
- Funds are more independent, with separate fund managers, independent custodians and own board of directors
- More transparent and has higher accountability, with shareholder rights, licensed agents, prospectuses, and annual reports to investors
- It is tax-exempt
- Disadvantages
- Has higher management fees
- May offer fewer investment choices for investors due to high capital requirements
Unit Investment Trust Funds
- Advantages
- A wider range of investment options available for investors
- Has usually no or very low sales charge
- Has lower management fees
- Disadvantages
- Has less regulation
- Is less transparent with its investments
- Comes with a 20% withholding tax on capital gains
I hope this article was able to help you know the difference between mutual funds and unit investment trust funds. If you should know, I have investments in both types.
And if you want to learn more about mutual funds, I suggest you read:
Investing in Mutual Funds
Are you still waiting for the “right time” to invest? Here’s my suggestion to you:
How Do You Know If It’s A Good Time To Invest?
Or are you afraid to invest altogether? Then here’s what you need:
An Investing Guide For People Who Are Afraid To Invest
Increase your financial literacy today and subscribe to Ready To Be Rich.
Reference:
Money Sense. “Mutual Funds vs UITFs“. March 22, 2010.
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Photo credit: tatooedjay and thecolourmill
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Hi, my name is Fitz and this is my blog entitled, Ready To Be Rich.
Hi Fritz,
Thanks for this point for point comparison between UITF & MF. No one even the agents of mutual funds or banks can give me a better explanation on the two funds than what you have given on this article. Hope you can post something about Index funds/ stocks in the future. too.
Hi,
You mentioned UITFs has 20% tax on capital gains. I have some trust funds but have not cashed them out. My question is will I still be taxed even if there is no gain meaning I sold at a loss?
Thanks
thanks a lot fritz! this is great. thanks for sharing. i love reading your blog.
@mildie
Thank you. Sure, I will try to do research on that and come up with a simple article to explain those.
@MD
As far as I know, you won’t be taxed if you sold at a loss. But to get an exact picture of what could happen in your case, I suggest you ask your bank directly about this. Thanks.
@anne
Thank you. I hope you can also tell your friends about my blog, I’d really appreciate that.
Nice comparison Fitz. I also had the same article discussing the similarities and differences.
http://www.millionaireacts.com/125/choose-mutual-funds-vs-uitfs.html
By the way, you forgot to mention that in mutual funds, each investor has the power to elect the fund managers since they are like the stockholders of a company whereas in UITFs, the investors don’t have the power. Only the Trust Department of a bank handles the fund.
Hi Fitz, I too have both MF and UITF. In the disadvantages of UITFs, I’m not sure I’ll agree with number 1 and 2 on your list.
On regulations, there are a lot of laws and BSP circulars which cover UITFs.
On transparency of investments, I can get monthly and quarterly reports on my UITFs which show the portfolio allocations and even top ten holdings, something that I don’t get from my MF. All I get is a quarterly report on how much my investment is.
@Tyrone
Yes – that’s also a good addition to their basic differences.
@silent_investor
Thanks for the inputs.
I, too get monthly and quarterly reports on my UITFs from my current bank, which is great. But I could not say the same for my previous bank where I used to have UITF investments.
Moreover, my MF also only gives quarterly reports but at any time, I can call them and request for a more detailed report on the allocations.
So, I guess it really depends on the MF company and the bank when it comes to the transparencies.
I have both MF and UITF, what i can say is both are performing very well. My MF has +1% return above my UITF.
I bought them at the same time to see the comparison between these pool funds
I have UITF in 2 banks both of which has no 20% witholding tax?
And as far as I know, the taxes are paid out of the fund’s assets
so the NAV is already net of all taxes and fees.
Which bank’s UITF still deducts a 20% witholding tax so I know
which bank to avoid hehehe
fitz,
can you explain why corporations issue bond instead of acquiring loan? I think you can avail lesser interest in loans than paying the bond rate which is higher. Thanks.
@Mark
Yes the NAV is already net of all taxes and fees because the taxes are already paid out by the fund’s assets, the witholding taxes are still there actually, but it’s already incorporated in the computation of the NAV – a strategy that banks now use to encourage more investors and make it simpler for them to understand how you can make / lose money from your investment.
@dodong
That’s an insightful question. As far as I know, there are many types of bonds and not all of them pay regular interests to the lender (ie, zero-coupon bonds). Some types of bonds don’t even have a maturity date (ie, perpetual bonds).
Unlike a bank loan, where the terms and conditions are often straightforward and fixed. Bonds have other mechanics that will make it for the company to have less costs in the long term.
@fritz, I’m guessing you haven’t seen any mutual fund’s annual
statements?
I look at PhilEquity’s and Sunlife’s.. its clear as day that
that’s also what mutual funds do, pay taxes from the fund’s
assets just like UITFs.
The one difference I can see is that since a mutual fund is
technically a corporation/company, it apparently can defer
its tax liabilities, except for those investments subject to
final taxes, i.e. deposits subject to 20% tax.
Also, you can see that dividends are not taxed. PhilEquity’s
report is clearer about this. Apparently, dividends recieved
by a corporation, which is what a mutual fund is, from another
corporation are not subject to taxes.
I’m not sure if UITFs are considered a corporation, I would
think not. so if they get dividends, they are probably taxed.
Cheers
@Fitz – Are bond funds (Fixed Income Funds) worth investing in? Thanks.
Hi JR Rosales, it first depends on what your investment objective is.
Second, it depends on how good the fund managers are. Funds are invested in several products, and you as an investor, should choose a fund that has managers that have the same investing attitude as yours.