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September 25, 2018

Investing 101: Mutual Funds vs. UITFs

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Where to invest? Mutual Funds (MF) or Unit Investment Trust Funds (UITFs)?  Many new investors actually gets confused about these investment vehicles because they have some similarities. In this post, we will break those similarities down and also their distinct features.

Similarities of Mutual Funds and Unit Investment Trust Funds

Mutual Funds and Unit Investment Trust Funds (UITFs) are both pooled funds managed by an expert fund manager.   A pooled fund, by the way, is combined money of many different investors to build a portfolio of financial instruments such as stocks, bonds or money market.

Pooled funds are also open-ended investments which means you can buy or redeem your money anytime you want.

Investing in a pooled fund can allow you to make your money earn potentially more than bank savings or time deposits without getting worried or stressed out about which asset class, security or stocks to pick. The fund managers or experts in investment do the financial analysis for you.

However, same as other investments, amount of returns is not guaranteed as your money will be exposed to risk and volatility.

Lastly, mutual funds and UITFs usually offer the same types of funds:

  1. Equity Funds– aggressive; long-term
  2. Balanced Funds– moderately aggressive; long-term
  3. Bond Funds– moderate risk; long-term
  4. Money Market Funds–moderate risk; short term
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Mutual Funds vs. UITFs (Differences)

 Mutual FundsUITFs
Where to InvestA Mutual Fund Company or Asset/Investment Management Company.The trust or treasury department or group of a commercial bank.
What you are actually buyingCommon shares in the investment companyUnits of participation in the fund
Sold byLicensed mutual fund agentsAuthorized bank employees
Regulatory BodySecurities and Exchange Commission (SEC)Bangko Sentral ng Pilipinas (BSP)
Price expressed asNet Asset Value Per Share (NAVPS)Net Asset Value Per Unit (NAVPU)
Charges1. 1%-5% sales charge
2. 0.5%-3% redemption fee
3. 1%-2.5% investment advisory, distributor and administration fees
1. 0%-2% sales charge
2. 1%-2% redemption fee
3. 1%-1.5% trust fees
How much money do you need to start Minimum investment to join the fund can be as low as Php 5,000.Sun Life’s Mutual Fund company offers initial investment of Php 1,000 only.Minimum initial playment ranges from Php 10,000 to Php100,000.
How do you earnPrimarily through income earned from dividends on stocks and interest on bonds.By selling your units of participation at a higher rate than when you purchased it.

Which is a better investment?

Mutual Funds and UITFs are really similar in nature. Nothing is better than the other in terms of which can give the higher return than the other. We can only look at their own advantages and disadvantages.

Advantages of Mutual Funds

  • Longer track record
  • Stricter regulation – Mutual Fund companies are required to submit regular reports and are subject to full disclosure
  • May give the investors dividends and other shareholder’s rights
  • Reports are more transparent and has higher accountability.
  • Fund are independent with separate fund managers. Companies really focus on their funds and performance.
  • It is tax-exempt for Capital Gains

Disadvantages of Mutual Funds

  • Higher expenses and therefore higher management fees
  • MF companies are not so easy to find like banks.

Advantages of UITFs

  • Easy access – because commercial banks are everywhere
  • No entry fees and costly management fees. Usually has very low sales charge
  • A wider variety of options are available

Disadvantages of UITFs

  • Doesn’t give shareholder rights
  • Has less regulation and is less transparent with its investments
  • 20% withholding tax on capital gains is imposed.

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