A lot of people on social media and those who are beginning to invest have one question. When investing in the Philippines which is better, mutual fund or unit investment trust fund (UITF)? And it’s been asked so many times that I finally just want to answer the question.
Mutual funds and UITFs are similar
That’s the short answer.
Mutual funds and UITF are structured the same way, so at first glance by principle there is no difference if you pick either one. Money from the investing public are pooled together to buy securities like stocks, bonds and money market instruments with the goal of maximizing potential net gains for clients. A fund manager does the trading on behalf of the investors. That’s it.
Mutual fund versus UITF
However, mutual funds and UITFs are different (for the sake of this discussion) by who regulates them and who offers them. You may want to check our article on managed funds if you want to see the difference between the two as well as other investment products like PERA, exchange traded fund, and variable universal life.
Mutual funds are regulated by the Securities and Exchange Commission. On the SEC website, you can see a list of approved mutual funds that can be offered in the market. Additionally, you can invest in them through investment mutual fund companies like First Metro Asset Management Inc (FAMI), PhilEquity, Philam Asset Management Inc (PAMI), etc. Some of them are sister companies of banks, so opening accounts and investing can be convenient through a bank account.
On the other hand, UITFs are regulated by the Bangko Sentral ng Pilipinas. They are offered by banks and trust companies. And again these banks can be a payment facility of mutual funds too as mentioned above. The table shows a summary of their differences.
|Who offers||Investment companies||Banks and trust companies|
|Who sells||SEC*-Licensed advisors||Trust agents|
|What you buy||Shares of mutual fund||Units of participation|
|Pricing||Net Asset Value Per Share (NAVPS)||Net Asset Value Per Unit (NAVPU)|
|Who regulates||Securities and Exchange Commission||Bangko Sentral ng Pilipinas|
|Laws||Republic Act 2629 – Investment Company Act of the Philippines||Republic Act 8791 – General Banking Law|
What does this all mean?
It means that both of these investment products are overseen by our government to make sure that the interest of the investing public is protected. They’re asked to comply to rules and regulations when it comes to reporting periodic updates, the way the value of stocks or units of participation are determined, and other very important details. Thus in principle, you can choose one or the other.
Four factors in choosing mutual fund or UITF
And yet there are factors that you should consider before investing in either mutual fund or UITF. Take note that these are the same factors in my opinion to think about when you’re choosing banks to invest in UITF. The choice which one to go with all boils down to four things:
- Company’s reputation. Do you trust the company? Do they have a long history of proven track record?
- Convenience. The company’s location is near your place of work or residence. It would be good as well if they have great customer service and knowledgeable reps, have other available banking or financial products, have an online portal, allow you to add investment automatically or redeem investment seamlessly and quickly, etc.
- Fund performance. Check the historical returns of the fund if it’s able to meet its stated goal as described in the fund’s prospectus or key information and investment disclosure statements (KIIDS). But remember that all past returns of the funds do not guarantee future performance.
- Fees. More of this in the next section.
Mutual fund and UITF fees
The last (and personally the most important) factor are the fees. Choose a fund that has the least charges. The higher they are, the lower your potential returns especially when you’re investing long term. If you read my article on selecting the best index funds in the market, the one with the best returns is the fund that has the least fee. So what are the fees that you should be concerned about?
- sales load
- management fee
- exit fee
- other fees
1. Sales load
Sales load is the fee that is charged every time you invest. So if you invested P10,000 and the fund has a sales load of 2%, the final amount that gets to your account is 9,800 (10,000 * 2% = 200 and then 10,000 – 200 = 9,800). This fee is also going to be charged when you put additional money into the account.
UITFs in general have an advantage. They don’t have any sales load as you can see from this article on UITF fees. In comparison, mutual funds charge anywhere between 0% to 5.6%. However, there are ways that you can avoid paying the mutual fund sales load.
Majority, if not all, of UITFs don’t charge any sales load which is one advantage it has over mutual funds.
Sales load affects your money in two ways: capital preservation and compound interest. Capital preservation means that the higher the sales load, the lower the amount that ends up in your account. See the table below for a ₱2,000 monthly investment in 5%, 2% and 0% sales load in a span of 30 years. The one with 0% fee actually has the highest invested amount, which is equal to your capital.
|YEAR||CAPITAL||5%- FEE INVESTED AMT||2%-FEE INVESTED AMT||0%-FEE INVESTED AMT|
Another effect is that it also lowers the return on your money especially when you’re investing long-term. The higher the sales load, the lower the possible gains that you get from investing. See the table below for comparison of funds with 5%, 2% and 0% sales load. The investment is ₱2,000 monthly in 30 years with the rate of return is 10%.
|YEAR||CAPITAL||5% FEE||2% FEE||0% FEE|
2. Management fee
Management fees are what sustain the operation of the funds. They pay for compensation and expenses that keep the fund going. Unlike sales load where it’s taken out of your money, the management fee is already computed with the mutual fund’s net asset value per share (NAVPS) or UITF’s net asset value per unit (NAVPU).
It goes without saying that it’s important to compare this charge among UITF and mutual funds, and choose the one with the least management fee.
3. Exit fee
The exit fee is charged when you redeem your money within the holding period. The holding period is the length of time between the day you put your money in and the day you get it back. There are funds that don’t have any exit fee, and there are those that require that you keep the money in anywhere between a matter of days to as long as 6 months.
There are two options that you can make. Either you choose a fund that do not have any exit fee or that you make sure that you only withdraw after the holding period.
4. Other fees
There are also other fees aside from those three mentioned above. You can actually take a look into the prospectus or KIIDS for more information. Examples are trustee fees, custodianship fees, external auditor fees, etc.
To sum it all up, the choice of going with either one of these two investment options is a personal one.
- Mutual funds and UITFs are structured the same way, and their primary differences lie in their regulation and availability, among other things.
- When choosing a fund, pick the company that you trust that you’d have the convenience in doing business, performance of the fund that meets its goal stated in prospectus or KIIDS, and a fund with the least fee.
- These are the fees to look out for: sales load, management fee, and exit fee.
- UITFs in general don’t have any sales load, and there are ways you can invest in mutual funds that have zero sales load.