Updated: April 18, 2021
Unit Investment Trust Funds have been gaining popularity as an investment among Filipinos in the past few years. The primary reason being its convenience as they’re available in most commercial banks.
But more importantly, it’s because more and more Filipinos are realizing that while it has a greater risk than time deposit accounts, the upside potential for your money to grow higher than inflation makes the risk worth taking.
Today, let’s answer a series of questions about UITF investing that many of you sent to me in the past several months.
The Basics
How to invest in UITF?
Just go to your bank and ask if they have UITF investment products. Most likely, they’ll have those and the bank officer will ask you to answer a risk assessment form to know which UITF will best suit your financial status and goals.
Is it safe to invest in UITF?
No investment is 100% risk-free. If you’re afraid to lose money, then just invest in low-risk UITFs and don’t put all your cash in just one fund. You can diversify or invest in other banks and investments as well.
How do you make money in UITF?
You buy units of the fund from the bank, and then sell back the units to the bank when their value increases. I’ve explained this process in greater detail in this UITF article.
Going Intermediate
Do you think it is a good idea for me to leave my money untouched in a UITF for several years? I’m considering this as a retirement fund.
I think it’s a great idea, put it in a Balanced or Equity fund because these UITFs grow higher than inflation rates, which is what you want primarily.
Also, rather than investing all your extra money in one go, it’s better to do small, same-amount, regular-period investments (P1,000 every month for example). This strategy is called cost-averaging, which is good to do for long-term investing.
Which do you think is good for the short-term and long-term? Balanced Fund or Equity Fund?
Balanced funds are good for medium-term (3 to 5 years), while Equity is always long-term (more than 5 years). For short-term (2 years or less), try Money Market or other conservative funds.
I’ve discussed the different types of mutual funds and UITFs in this post and I encourage you to read it to understand why there are so many types of pooled funds.
What is the difference between buying units directly from the bank and buying a variable plan from an insurance company, which is also managed by fund managers?
They’re similar but not the same. The variable plan is no longer a UITF, it is a life insurance plan with an investment component — and money for that investment part is usually put in mutual funds, which is also a pooled fund just like UITFs.
If you need protection, buy life insurance. But if you want to invest, my suggestion is to invest directly in a fund. If you need both, then it’s better to get them separately.
Complex Questions
You said that high-risk investments like Equity funds should be redeemed after 5 years or more. Let’s say that I lose track of time and the market is doing bad again, will I need to wait for another 5 years or more?
If the market goes bad, chances are you’ll be somewhere around breakeven at 5 years (rarely happens, and you’ll probably be positive still) –- which means you won’t have to wait another 5 years, the worst-case scenario would be 2-3 years in my opinion. Just monitor the market and redeem when the profits are acceptable to you.
Is doing cost averaging also the same as EIP (Easy Investment Program) offered by COL Financial?
It is the same, just applied on different instruments. The EIP of COL Financial is cost averaging for the Philippine stock market, and banks have similar products for UITFs.
Banco de Oro also offers EIP for UITF, and the mechanic is similar to COL Financial’s EIP where they auto-debit your decided amount from your savings account and buys units of your chosen fund every month — thus allowing you to do cost averaging.
EIP (easy investment plan) is just a term for the program, and other banks have similar products that allow you to cost average UITFs. For example, the Bank of the Philippine Islands (BPI) has the RSP or Regular Subscription Plan, which is the same as BDO’s EIP.
If your bank doesn’t have this kind of program, then you can always ask your branch manager if it’s possible to create this automatic investment mechanic for your account.
Lastly, if all else “fails”, you can always do it by yourself and manually invest a fixed amount regularly in a UITF (or other investment) product.
Is compounding applicable to UITFs? If so, how? My thinking is that if I am already doing cost averaging, should I just leave my money in the fund or should I redeem a portion amounting to the interest and re-invest them from time to time? How do you explain the performance growth of funds?
Mathematically speaking, compounding does not happen in UITFs, nor in Mutual Fund investments. Compounding, technically only happens in time deposit investments.
Also, cost averaging is an investment strategy that helps you minimize your paper losses. It also doesn’t make your investment compound.
Yes, you can redeem a portion of your UITF amounting to the interest to lock in your gains, and then just re-invest. However, I don’t recommend it because it will dilute your average price.
Instead of reinvesting, just invest more money, and let the investment ride the market until you need the money for your financial goal.
Lastly, let me illustrate what the growth rate stated in the historical performance of funds means…
Let’s say one share of a UITF is P100, and it becomes P200 after 5 years. Then your investment has doubled in a span of 5 years.
People often express this in terms of the annual rate of return, which is 14.87% – which means your investment has “compounded annually” at a rate of 14.87%.
This is done to make people realize that stocks and pooled funds are better than time deposits, which typically compound annually at only 4% or less.
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Photo credits: mrjoro and hungrytiger11
Thank you and keep it up!
Pls. do share/teach us on how to invest on Land.
Hello…I wanted to open a UITF but I was told by an insurance agent that in case something happens to me my family won’t be able to get my money from my UITF…that’s why I’m being convince by the same insurance agent to just get a VUL…what do u think?
Hi Ems. What company is your insurance agent from?
That is NOT TRUE — your agent is not telling you the complete truth.
Your UITF investments are part of your estate and your family will be able to get it after they pay the estate taxes — an amount that your life insurance will cover.
Your UITF investments will be frozen when you die, and your family will not be able to get it because they need to pay estate taxes.
This is where you life insurance will come in, your family will immediately receive the cash benefits of your life insurance, and then part of it — they can now use to pay the estate taxes and the UITF investments can now be “unfrozen” and will be given to them in whole.
But think about this also…
If you encounter a financial emergency, and you fail to invest additional money in your UITF — nothing will happen to your investment, it will just be there and will continue to grow.
However, if you have a financial emergency, and fail to pay for your VUL, your policy will lapse after a few months — and all the money you paid, including those paid for your investments, will be gone.
A VUL with a 1M coverage will cost around P50,000 per year. But a term-life insurance with a 1M coverage will only cost around P6,000 a year. See the big difference? It’s easier to pay for a term-life insurance.
Life insurance is important — but get only term-life insurance — for financial protection. But invest separately in UITFs, mutual funds, and stocks.
Term-life insurance is much cheaper than VUL. You don’t need a 2-in-1 product.
Hi, good afternoon.
Just want to ask, which is better: actively managed equity funds or equity index funds? i have read an online blog by harald baldr that low cost index funds are the best equity funds. i have also read an ebook about investing in that index funds are better and in that book, it was also recommended by warren buffet. is it also the same case here in PH? are index funds better?
Hope to here from u soon. Thanks!!!