I consider UITF’s as one of the most basic and simplest investment product out there. Surprisingly, many are not aware what it is exactly, and how one makes money from it.
That’s why for today, I’m providing a basic explanation of what UITF means.
I will tell you how how it works; how you make money from it; and of course, where to go if you want to invest in UITF’s.
So the first question that we should answer is, what does UITF stand for? It’s an acronym for Unit Investment Trust Fund.
First, I want you to focus on the word “FUND” because that’s what it is basically – a pool of money from many individuals.
Who gets the pool of money? The bank… or more specifically – the trust, investment or treasury department of the bank.
A UITF is an investment product that most, if not all, commercial banks offer.
And if you want to invest in a unit investment trust fund, then all you have to do is to go to a bank.
UITF is a generic term and banks often call them by many different names. One thing that they all have in common is that they have the word “FUND” at the end.
— Pause reading here and let it all sink in first. —
Moving on… when you invest in a UITF, you are actually buying “units” or shares of the fund, that’s why there’s the word “UNIT” in UITF.
And the price of one unit is often called NAVPU or Net Asset Value Per Unit.
So if the NAVPU of a UITF is at P1.50 and you invest P30,000 into the fund, then you will get 20,000 units of the fund in exchange for the money you gave to the bank.
When you invest in a UITF, the bank will (and should) give you a certificate that states exactly how many units you own. And in our example, your certificate will state that you own 20,000 units.
— So far so good? Read it again if it’s unclear. —
What happens next now?
Well the bank, specifically the fund’s manager (or managers), will use your money and invest it in “more complicated” investment products like government securities, bonds, the stock market and many others.
That’s why there are many kinds of UITF; and it’s name usually indicates where the money is being invested by the fund manager.
For example, the money pooled into BPI’s Short Term Fund is normally invested in short-term government securities, money market securities, and other highly marketable fixed-income instruments.
Meanwhile, the money pooled into BDO’s Equity Fund is normally invested in a diverse selection of stock exchange-listed companies.
How do you earn from UITF?
The fund manager (who has everyone’s money) will now do his (or her) best to make the money grow by making good and sound investing decisions.
An equity fund manager, for example, will constantly study and monitor trends in the stock market so that the pool of money from the fund that is invested in it grows.
At the end of the day, if the market went well and the fund manager was able to make good decisions, then the net value of the fund will increase.
On the other hand, if the market went down, and the fund manager was not able to cut investment losses, then the net value of the fund will decrease.
How do you know if the fund manager of your UITF had a “good day” or a “bad day”?
Check the price of the NAVPU. The change from yesterday’s price will indicate if it was a good day or a bad day for the fund. And note that the NAVPU changes everyday!
If the NAVPU yesterday was P1.50 and today it became P1.51 – then the market was good. But if the NAVPU today went down to only P1.49 – then the market was bad.
— The moment you’ve been waiting for… —
Now this is how you earn (or lose money) from UITF investments…
Remember that your money is in the fund, and what you have in your possession is just a certificate that says you own 20,000 units.
When the time comes that you need the money, you can just go to the bank and say that you will redeem your investment.
This is basically saying that you want to give the 20,000 units back to the bank and you want to take your money out of the fund. When you do this, the bank cannot say “No” and they are obliged to exchange the units for cash based on the current NAVPU.
So let’s say after one year, the NAVPU has become P1.65. If you redeem your investment at this point, then you will receive P33,000 – which means you just earned P3,000 by investing P30,000 for one year in the UITF.
However, if the NAVPU after one year went down to P1.40 and you redeem your investment because you really, really need the money, then you will only receive P28,000 – which means you just lost P2,000.
And that’s how UITF investing works!
If you understood all that, then you should know that mutual funds basically work the same way.
Of course, this is a very simplified version and there will be fees, documentary stamps, taxes and specific bank terms and conditions that you should be aware of before you invest in UITF’s.
A good place to start reading is this article where I compared mutual funds vs unit investment trust funds.
I guess that’s it!
I hope I was able to help you understand UITF’s better. If you have any questions, then don’t hesitate to ask it through the comments section below and I’ll try my best to answer them.
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