What is a UITF and How do UITFs Work?





Unit Investment Trust Funds or UITFs are very popular among Filipinos. It has become a vehicle for the middle class to take part in the stock market without putting out a lot of money or studying stock trading. I started investing in UITFs when I started having disposable income three years ago. When I first read on UITFs, I found it disconcerting that everything written on blogs, in an attempt to demystify UITFs was either overwhelming (with information) or too technical. I also noticed that most articles about UITFs don’t explain the different kinds of UITFs, often sticking with just explaining Stock or Equity UITFs (UITFs that invest in stocks).

In this post, I shall try to attempt to explain what UITFs are in a manner that is not too technical and less overwhelming, and I shall be limiting it to Stock and Equity UITFs. In another post, I will be talking about the different UITFs available. So please note that since I will be talking about Stock or Equity UITFs only in this article, the term UITF from hereon shall mean Stock or Equity UITFs.

A company’s shares or stocks can be bought at a certain price. Basically, the price of a company’s share multiplied with its total number of shares is the entire worth of a company. When the company’s profits go up, the price of each of its share also goes up. And consequently, when the company’s profits go down, the price of each of its share would also go down.

This is pretty much how a UITF works also. A UITF is like a company whose business is investing in the stock market (this is just an analogy). That’s how it makes money. It trades stocks. There will be a fund manager who will be in charge of all the stock trading needed for the company to make money. When its profits go up or when the stock market goes up, the share of the UITF will go up, and when its profits go down. or the stock market goes down, its share will also go down.

When you buy 10 UITF shares at 10 pesos and sell them at a later date when the UITF share price is only 5 pesos, you lose 50 pesos.

I know that some of you out there have the concept of time deposit in mind when it comes to UITF investing. You think that you have to keep your money in the UITF for a certain period. This is wrong. You can sell your UITF shares any time you wish; some banks though charge a fee for selling your UITF shares too early. You might also be thinking that you will be getting a fixed income from your UITF investment just like in time deposits, you don’t, that is not how UITFs work. When you buy 10 UITF shares at 10 pesos and sell it at a later date when the UITF share price becomes 20 pesos, you earn 100 pesos (10 shares x 10 peso increase in share price= 100 pesos profit). That is how you make money. If you’re asking how long it takes for your investment to earn, nobody can tell. It all depends on how good the fund manager is with stock trading.

In technical terms, the UITF share price is called NAVPU or Net Asset Value per Unit. Note that in this post, the term "share" was used instead of "unit", this is because more people are acquainted with this term. You can check the price per share of a UITF on its website. UITFs charge a trust fee, however, you won’t notice it anymore because it is already incorporated in the NAVPU.

Most UITFs will require 10,000 pesos to open an account. UITFs are not guaranteed by the PDIC. Proceeds derived from UITFs are not taxable.

The goal of this post is just to acquaint the reader on how UITFs work. This article is by no means a comprehensive guide on UITFs.

For my next post, I shall be talking about the different kinds of UITFs available.

2 comments:

jett kevin Reguine said...

"You might also be thinking that you will be getting a fixed income from your UITF investment. You don’t, that is not how UITFs work. When you buy 10 UITF shares at 15 pesos and sell it at a later date when the UITF share price becomes 20 pesos, you earn 100 pesos (100 shares x 100 peso profit)"

Hello!

Nice blog, I just don't understand this part of your article. if you sell your 10 UITF share when it is already 20 pesos each, you earn only 50 pesos right? [(10x20)-(10x15)] = 50 pesos

And also what is the meaning of
this (100 shares x 100 peso profit)?

thanks!

Jerome C Herrera said...

Hi Jett. Thanks for commenting and pointing out that error. I apologize for the confusion. I have duly corrected it. :D