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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Welcome to my blog, Ready To Be Rich.
Hi, my name is Fitz and this is my blog.
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.
Hi again Fitz.
Please enlighten me: is investing in the stock market ie buying blue chip stocks different from investing with uitf?
I am already familiar with the investment procedure for uitf, but i need help with stock market. Where do i go? How do i start? Is this also available with bpi or bdo like uitf? Or do you recommend citiseconline?
I am a beginner. I plan to invest 5k per month for the next 3 years. I was already contemplating on uitf, but i got confused when i stumbled upon your yahoo stock market investment article.
Which do you personally recommend for a beginner like me? I already have an e-fund, identified my objectives and investment time.
Please explain in detail. Thanks for the help.
Hi Richie,
When you invest in a UITF, you are placing your “trust” to the investment managers of the fund – which means you are giving them the freedom to make investing decisions for you.
UITF’s invest in several products, including the stock market. Depending on the risk profile of the fund, it will have blue-chip, growth and/or speculative stocks in their portfolio.
On the other hand, if you invest directly in the stock market, through a broker such as Citiseconline (and many others). You have full control of your portfolio and you will be the one who will make the investment decisions.
The main advantage of investing directly on the stock market is that you get to earn from dividends (not really that much, but it’s still income), and you can choose to invest in companies which you truly believe in.
At the most basic level – equity funds (UITF) and stock investing are the same. UITF’s are geared more towards people who don’t have time to “study the market”; while stock investing is for those who would like to be more “hands on” with their investments.
Both products experience moderate to high income, but those who take the time to learn about how the stock market works tend to gain relatively higher income – that’s why some people choose it over UITFs.
For beginners, I’d recommend UITF’s – but I encourage that you take the time also to learn about stock market investing – because it’s another great investment product which you might want to consider in the future.
Personally, I invest in both – that is, if I were in your shoes – I’d invest P5k this month in a UITF, then P5k next month in the stock market, then add P5k to my UITF the month after that, and so on – but that’s just me.
Hope I was able to help.
Just want to clear that stocks and managed funds (mutual funds/uitfs) can be compared as apple to apple.
In basic level, they look the same but deeper analysis will give you a better understanding.
I will stick on mutual fund analysis, since my last post on Nov. 2010, I had uitf that time but I unwind my positions there and concentrate on mutual fund investing.
When you invest in stocks, you will gain income when your chosen company declares dividend.
The question here is, did you hand pick a stock that provide dividend?
When you invest in a managed fund like my mutual fund, the MF company recieves dividends to its collective shares of dividend earning companies selected by the fund manager and bein hold by the MF in the long term.
Aside from (1) Dividend Income, it has also cashflow coming from (2) Interest income _ corporate notes/debt where MF has invested and (3) Investment/Capital gain income-from realizing the positive paper gains of some companies I.e.selling the stocks.(4) Net cashflow between those who are entering the MF minus those who redeem their investment.
This info is coming from SEC Form 20-IS filed by mutual funds as mandated by SEC.
I think the main advantage of stock is Transparency, you see what you buy with 5K.
While Mutual Fund’s main advantage is Diversification, you are buying a portfolio of blue chip companies, with your 5K pesos.
Thank you Fitz.
I am actually doing my own research on both investment vehicles (like what you did in the past). It’s great that there are people like you who take time to help.
May i ask though why you suggested alternate investments in uitf and stock market?
With stock market investments, I am most familiar with citiseconline. Would you say citiseconline is reliable? Bo Sanchez recommended them, do you?
Again, thank you. Thanks to FreePinoy too!
Will pay forward,
Richie
are you paid by BDo and BPi? You keep on advertising them;-) it is annoying.
Hi Sam.
Sorry if it annoys you that I often write about BDO and BPI.
No, I am not paid by them and the main reason why I often write about them is because those are the two banks where I have investing experience with.
If I purchase an investment product with Metrobank, Chinabank, PNB or any other bank in the future – then I would surely write about them too.
Lastly, it is my personal policy to disclose all sponsored posts and paid advertorial articles that I publish here.
I hope I was able to clarify this matter with you.
Its easy for me to explain my FAMI MF investment than explaining other providers .. Thus, i dont think Friz point of view is not annoying since he’s more familiar with BDO/BPI.
I think its just a different perspective from our personal experiences.
BTW, i use somethings BDO and BPI as intermediary banks for my non-investments funds..
Happy investing everyone!!
Mr. Fritz:
In your own analysis which among the Dollar denominated UITFs being offered by different banks looks most promising and profitable?
Thank you
Mr. Fritz:
1. May I know what will happen to the investment if the investor dies, specifically for those long-term UITFs or MF.
2. Can UITFs or MF serve as a living trust fund?
3. Can a family member of the investor claim/continue his investment if the investor dies.
4. If I have $2000 in which UITF should i invest it so that it will be atleast $20,000 in 20years.
5. Are UITFs or MF transferrable?
Thank you and hope you could enlighten me with my queries.
I’m trying to study UITFs and MF. Hopefully be able to make a good investment.
Another reason why I seek your advice, is that my line of work is risky and insurance or time deposit alone is not enough to leave behind for my kids. I need other options, that is why I want to try UITFs & MF.
Thank you and more power to your advocate.
Rdgs;
java
Hi Java.
In case of death, a family member can request the transfer of units of the deceased to his or her account. Documents must be submitted, depending on the bank or mutual fund company – but the bottomline is, yes it can be claimed and continued by the family member.
Moreover, the process would go faster, in my opinion, if the units / assets / investments are included / stipulated in the person’s last will and testament.
With regards to your investment goal, I honestly don’t know what UITF would give you that result – I believe nobody can tell that for sure – but historically, equity funds have the highest performance in the long term.
Also, I would advise that instead of investing $2000 in one go, do cost averaging and invest smaller amounts in fixed periods over a long period of time.
Hi Fritz
I am a banker at Deutsche Bank and live in Singapore.
in summary, I have a Filipino assistant who is 45. I recently forced er to invest and contributed towards her SSS. But that wouldn’t be enough alone when she retires.
Coud you suggest anything where she could invest 100 dollar per month for next 10 years?
Looking at her profile, she would rather invest into a more conservative. Any products (saving, M Funds, bond linked, etc).
Will appreciate as i have no knowledge about Philippines based planes.
Hi Kumar.
In my opinion, the best investment for your Filipino assistant would be a UITF equity or balanced fund.
Both fund types are moderate to high-risk investments but given that she will be doing cost averaging and buying units for a long period of time, the risk of losing money from it will certainly go down – plus the potential income would be higher than most investment types.
Additionally, since UITFs are available in big commercial banks, that adds a little bit more security to the investment as compared to investing with an independent mutual fund company. I would recommend going for the top 2 banks in the Philippines: BPI and BDO.
Each of those have their own UITF products which she can invest in.
Moreover, BPI has RSP (regular subscription plan) while BDO has EIP (easy investment plan) – which are both automatic investments service where they take out a portion of your money from your savings account on a monthly basis to buy investment units in their UITF.
“So which one is better? I personally believe neither one can give a higher return than the other.”
Tell me then, why some people go for UITF even though it is subject to withholding tax of 20% on capital gains, while Mutual Fund is tax exempt?
Marius de Jess
Hi Marius. There are many reasons for choosing UITF over MF, some of them are given above in the advantages and disadvantages section.
Personally, I believe UITFs are more accessible because you can just go to your own commercial bank and invest while with MFs, you’d have to do some due diligence to find a secure and reputable company to invest with.
Also, UITFs usually have lower starting capital requirements than MFs – which is a factor you should consider if you’re a new investor.
Greetings!
Hi Fitz, i’m here again for some questions, hope you can help me. First, is COL automatically deducting their management fees in the market price value when buying and selling stocks? Just for confirmation that when you buy stocks they charge you around 12% and almost the same when you sell your stocks?.
Merry christmas and a happy new year Fitz.
Hi Rajon,
Yes, COL deducts fees both when you buy and sell. These charges are the broker’s commission, VAT, PSE transaction fee, SCCP fees and sales tax.
The detailed breakdown is available HERE
great post! i believe that MF and UITF are essentially the same but i personally prefer UITFs because of the lower management fee and convenience especially if your account is enrolled in an auto-debit program such as BDO’s Easy Investment Plan. If not checked regularly, magugulat ka na lang in a couple of years or so, naggrow na yung investment na pakonti konti just like a turtle.
With regards to one of UITFs disadvantages, I think that MFs do not really have this tax advantage over UITFs. The 20% tax is subjected into both UITF and mutual fund NAVPUs/NAVPS as they are not exempted from this final tax on interest earnings. That separate 20% witholding tax has been clarified by a press release from Punong Bayan and Araullo. The way i see it, parang marketing strategy ng mga mutual fund agents to not choose UITF over MF. As to performance, pare parehas lang naman. very minimal differences. pareparehas kasi nag-iinvest sa blue chips.
Hi! I’m new to MF and UITF, in fact I’ve yet to invest in it. My question is, if for example I am investing 10,000Php per month for let’s say three years (so as to follow the peso cost averaging technique) and I’ve found out that the units bought in September to November of Year 1 have the highest ROI, can I choose to sell the units I bought only in that three-month period having the highest ROI? Do you I get the same answer to both the UITF and MF?
Hi Fritz,
Thanks for the information you’ve shared. I have diversified investments in UITF of different banks since I started last year. All my funds have a surprisingly positive results due to the good performance of PSEi.
That is why just 8 or 9 days agao, I reinvested in BPI-UITF when the PSEi has breached its all time record high. I guess the timing was not right, it’s only near 8 days since I invested in BPI-balance and BPI-equity, I’ve lost 2.5% of my investment already.
My question is, would you suggest I pull-out my money and charge it to experience nalang, and offset my loses to my other positive investments? or you suggest to wait for the unit value to appraise in the coming days or months?
Would you suggest also that I withdraw my other placements that earned 12 to 15% already in less than a year time?
I hope you could help me. Thank you!
Hi John Lim. What are your investment objectives? That will dictate when you should redeem your shares.
Balanced and Equity funds are moderate and long-term investments – this means it is recommended that your MINIMUM holding period is 3-5 years.
During this time, the price will experience fluctuations… it can even go negative. But in the long-term, it should go back up.
What should you do? Again, ask yourself for what are you going to use the money you invested.
If it’s for something you need or plan to buy 3-5 years or more in the future, then just let it sit there.
One last tip… control your fear and your greed. Minimize emotions in monitoring your investments.
Hi Fritz, I’m a newbie in investing and has been reading a book “Millionaire Teacher” by Andrew Hallam ISBN 9780470830062 (btw, a good read!)…he advised that a portfolio composed of a stock market index and a bond market index could give very powerful returns.
My question is, what are the Philippine equivalent of these indexes? Is it the PSE index and the ABF Philippines Bond Index Fund respectively? Thanks.
Your advantages and disadvantages portion of UITFs and Mutual Funds are misleading. How do you know which is better regulated? How can you tell which is more transparent? what is your basis for this?
And by the way, both MF and UITF investments are subject to final withholding tax on their investments
Hi Sir Mike. Thank you for the comment.
Please give us more details on the advantages and disadvantages, we’d love to know these based from the point of view of an investment officer.
I’ll edit the post above and make it clearer and more accurate once you share your thoughts.
The information stated there is based on the things said to me by a mutual fund agent, and a commercial bank branch manager.
Thanks!
Hi i have a question about Uitf:
1. If i redeem my earnings (beyond minimum
Holding period and i am still beyond minimum amount requirement), what will happen to the navpu of my remaining units? Will it be rolled over to the navpu of the day i redeemed partial earnings?? Or will it remain the samr as before?
2. Can i open two separte equity fund in the same bank if i plan to redeem more on the other fund than the other or will it always add up?
3. If i add money in my fund, what happens to
The navpu of the money i had in the fund before? Like is
That two different portfolio to be treated?
Thank you
HI Fitz. I had an investment in UITF (balanced fund) and they hold my investment for at least 3months. The NAVPU at that time let’s just say was 3.30xx. Now, the NAVPU nose dived to 3.14xx and in a few days my 3 months is due. My question is, what do you think is best: Should I remain my investment and roll it for another 3months? or should I withdraw it at a loss and buy the current price of NAVPU? Thank you.
@Zest
1. It will remain the same before.
2. Yes, you can open two fund accounts with most banks. Ask you bank what’s their policy on this.
3. You don’t have money in your fund, what you have are “units of investment” – and adding to your investment means you are buying more units. The average price to which you bought them changes each time you buy units (invests in the fund).
@joe. I’d say just hold. But more importantly…
Why did you invest in the first place? What is your objective for this investment? I can give you a better answer if you tell me these.