Mutual Funds, UITFs, and ETFs in Philippines

• Mutual funds pool money from investors to build diversified portfolios managed by fund managers.
• Investors purchase shares; returns depend on the performance of assets like stocks and bonds.

How Mutual Funds Work

• Investors buy shares, becoming part-owners of the fund.
• Fund managers select securities, such as stocks and bonds, for investment.
• Investors can redeem shares for the net asset value (NAV) of the fund.

Examples of Mutual Funds in the Philippines

• Sun Life
• ATRAM
• ALFM
• Philam
• Philequity

Unit Investment Trust Funds (UITFs)

• UITFs are similar to mutual funds but managed by banks.
• Investors buy units of the trust but do not become part-owners of the bank.
• Banks like BPI, PNB, and BDO offer UITFs in bonds, stocks, and government securities.

Exchange-Traded Funds (ETFs)

• ETFs are diversified portfolios traded on the stock exchange like stocks.
• Shares can be bought and sold throughout the day via the Philippine Stock Exchange (PSE).
• FMETF tracks the PSE Index (PSEi), giving exposure to the top 30 listed companies in the Philippines.

Minimum Investment Requirements

• Mutual Funds: Typically range from ₱1,000 to ₱5,000 depending on the fund.
• UITFs: Generally have a minimum initial investment of ₱1,000, but some funds may require more.
• ETFs: Require purchasing at least one share, with FMETF ranging from ₱50 to ₱100 per share, plus brokerage fees.
• Philequity Growth Fund has a minimum initial investment of ₱5,000.
• BPI UITF requires an initial investment of ₱1,000.
• FMETF may cost about ₱50-₱100 per share.

Differences Between Mutual Funds and Other Investment Vehicles

• Stocks represent ownership in a single company, relying on that company's performance.
• Mutual funds pool investments, diversifying risk across many companies and sectors.

Mutual Funds vs. Stocks

• Stock Investment: Buying shares of a company ties investment value directly to that company’s stock price movements.
• Mutual Fund Investment: Buying shares in a fund, offers diversification across different debt securities.

Mutual Funds vs. Unit Investment Trust Funds (UITFs)

• Mutual Funds: Managed by non-bank companies; investing means buying shares of the managing company, making you a part-owner.
• UITFs: Managed by banks; investors purchase units and do not become part-owners of the bank.
• Investing in a fund, means owning shares in the investment company.
• Investing in a bank-managed fund, means owning units of the pool, without becoming a bank part-owner.

Mutual Funds vs. Exchange-Traded Funds (ETFs)

• ETFs differ in how they are bought and sold; mutual funds are purchased directly from the managing company, while ETFs are traded on the stock exchange.
• Investing in a fund, requires direct subscription through the company’s platform or agents.
• An ETF, can be bought or sold throughout the trading day via the Philippine Stock Exchange (PSE).

Similarities and Differences

• Mutual Funds are managed by non-bank investments companies, regulated by the SEC and offer shares in the company. They actively manage diversified portfolios with minimum investments of ₱1,000 to ₱5,000; shares can be redeemed at NAV (once a day) and are subject to management fees, front-end loads, exit fees, and taxable income. Risk is moderate to high.
• UITFs are managed by banks, regulated by the BSP and offer units in the trust fund. They actively or passively manage portfolios with minimum investments of ₱1,000. Units can be redeemed at NAVpu (once a day) and are subject to management fees (with no front-end loads), taxable income, and moderate to low risk (depending on asset types).
• ETFs are managed by asset management companies, regulated by the SEC and offer shares which are listed on the stock exchange. They passively track a market index (like PSEi). Shares are bought on the PSE via brokers for around ₱50-₱100 per share, traded throughout the day and have low management fees and brokerage fees. Risk if moderate to high (depending on asset mix) and are have taxable income.

How to Earn Money

• Capital Gains: Investment grows as securities in the fund increase in price, raising the NAV.
• Dividends: Earnings from stocks or bonds are distributed to investors.
• Increased NAV: Value of assets in the fund rising increases the NAV.

Risk and Return Considerations

• Mutual Funds: Offer various risk levels; equity funds are riskier with higher returns, while bond funds are safer with lower returns.
• UITFs: Can be more stable, especially bond UITFs, with less volatility.
• ETFs: Offer low-cost access to market indices but carry market volatility risk.

Risk Example

• Equity Mutual Funds perform well when the market rallies but lose value during downturns.
• Bond Funds (UITFs) or Money Market Funds suit conservative investors who prefer stable returns.

UITFs

• Best for Stability and Bank Management for conservative investors preferring lower fees and bank management.
• Pros: Lower management fees, bank-managed, and good for conservative investors (bond or money market UITFs).
• Cons: Limited diversification and fund variety.
• Example: A fixed income fund offers stable returns around 4% to 5% annually, investing in government and corporate bonds.

Mutual Funds

• Best for Active Management and Diversification for investors wanting active management and broader options.
• Pros: Diversification, active management, and ideal for growth or income.
• Cons: Higher fees and less liquid than ETFs.
• Example: A fund offers long-term growth (9-11% annually) by investing in a mix of equity and bond assets.

ETFs

• Best for Low-Cost, Passive Investing with Liquidity for investors wanting low costs and trading ability.
• Pros: Low management fees, liquidity (can be traded during market hours), and ideal for passive investors.
• Cons: Limited to the stocks or index tracked and brokerage fees may occur.
• Example: An ETF tracks the PSEi with an annual return of 7-8%, investing in the top 30 companies in the Philippines.

Comparing Performance

• Mutual Funds (Active Management): Higher returns but higher fees (8%–12% for Equity Funds, 4%–6% for Bond Funds).
• UITFs (Bank-Managed): Lower fees and safer but may offer lower returns (4%–6% for Bond UITFs, 2%–4% for Money Market UITFs).
• ETFs (Passive Investment): Low fees depending on market index performance (6%–8% for PSEi ETF).

Which Is Right

• Choose UITFs for bank-managed funds with lower fees and safer investments, ideal for beginners wanting smaller investments.
• Choose Mutual Funds for a wide range of professionally managed investments, suitable for those with moderate to high risk tolerance looking for long-term growth.
• Choose ETFs for low-cost, passively managed investments with liquidity, good for diversified indices and those needing trading flexibility.

Mutual Fund Advantages

• Diversification: Spreads investments across asset classes and sectors, reducing risk.
• Professional Management: Managed by experts to optimize returns.
• Liquidity: Shares can be bought or sold easily.
• Affordability: Accessible with small initial investments.
• Convenience: Reduces the need to research individual stocks.

Mutual Fund Disadvantages

• Management Fees: Expense ratios can reduce net returns.
• Potential for Underperformance: Some funds do not outperform the market.
• Lack of Control: Investors have no say in stock selection.
• Tax Inefficiency: Taxes may be owed on distributions even without selling shares.
• Investing $1,000 in a mutual fund with an 8% annual return shows the power of compound interest over time.

Net Asset Value (NAV)

• The Net Asset Value (NAV) represents the per-share value of a mutual fund.

Importance of NAV

• Performance Measurement: NAV tracks fund performance.
• Investment Decisions: NAV helps investors determine if a fund is a good investment.

How to Calculate NAV

• Formula: NAV = (Total Assets - Liabilities) / Shares Outstanding
• Total Assets: Value of all investments.
• Liabilities: Debts or costs of the fund.
• Shares Outstanding: Number of mutual fund shares in circulation.

Approaches to Determining NAV

• Daily NAV Calculation: Updated after the market closes each business day.
• Real-Time NAV: Updated throughout the day, especially for ETFs.

Assets Under Management (AUM)

• Assets Under Management (AUM) refers to the total value of assets managed by the mutual fund.
• A larger AUM generally means the fund has more resources to diversify its investments, which could reduce risk.

Why AUM Matters

• Fund Stability: Larger AUM means more resources for diversification, reducing risk.
• Management Fees: Higher AUM can lead to lower management fees.

Structure of Mutual Funds and Charges

• Fund Manager: Decides which investments to buy or sell.
• Custodian: Holds the fund's assets for safekeeping.
• Distributor: Markets and sells the fund.

Charges in Mutual Funds

• Management Fees: Cover the costs of managing the fund.
• Load Fees: Sales commissions when buying or selling shares.
• Expense Ratio: Annual cost of the fund, including management, administrative, and operational expenses.
• Other Fees: Custodian, marketing, and transaction fees.
• Weighing the Costs of Mutual Funds is and understanding them is critical for investment decisions.

Expense Ratio

• Definition: Annual percentage of investment charged for management and administration.
• How It Works: A 1% expense ratio means $100 in fees for every $10,000 invested.
• Types of Costs Included: Management fees, administrative costs, marketing fees.
• Example: A fund with an expense ratio of 0.1% costs $10 per year for every $10,000 invested.

Load Fees

• Definition: Sales charges paid when buying or selling shares.
• Types of Load Fees:
  • Front-End Load: Paid when purchasing shares, reducing the initial investment amount.
  • Back-End Load: Paid when selling shares, often decreasing over time.
  • No-Load Funds: No sales charges.
  • Low-cost funds don’t charge loads.

Turnover Ratio

• Definition: Measures how often a fund’s investments are bought and sold annually.
• Impact on Costs: High turnover increases transaction costs and taxes.
• A fund with a 100% turnover ratio replaces its entire portfolio within a year.

How Costs Affect Returns

• Importance of Low Fees: High fees can significantly reduce long-term gains due to compounding.
  • Taxes, Dividends, and Distributions

Dividends

• Definition: Payouts from a company’s profits to shareholders, distributed by mutual funds.
• Types of Dividends:
  • Qualified Dividends: Taxed at a lower rate.
  • Non-Qualified Dividends: Taxed at regular income tax rate.
  • Capital Gains Distributions

Capital Gains Distributions

• Definition: Profits from selling securities distributed to investors.
• How It’s Taxed:
  • Short-Term Capital Gains: Taxed as ordinary income.
  • Long-Term Capital Gains: Taxed at lower rates.

Tax-Efficient Funds

• Index Funds and ETFs: Low turnover results in fewer taxable events.
• Tax-Deferred Accounts: Shields from immediate taxes.

Risk and Return Relationship

• Higher Risk = Higher Potential Return: Stocks are riskier than bonds but offer higher returns.
• Risk Diversification: Mutual funds spread risk by investing in various assets.
• Low-Risk, Low-Return Funds: Money market or bond funds provide steady, modest returns with less risk.
• High-Risk, High-Return Funds: Stock funds offer higher returns but with more volatility.
• NAV helps measure a fund's performance.
• AUM shows the fund's size, influencing stability and fees.
• Funds have fees that impact payment for services.
• Risk and Return are linked but should be balanced.