Mutual Funds, UITFs, and ETFs in the Philippines

• Mutual funds pool money from investors for diversified portfolios managed by fund managers.
• Investors purchase shares, and returns depend on the performance of assets like stocks, bonds, or money market instruments.

How Mutual Funds Work

• Investors become part-owners by buying shares in the mutual fund company.
• Fund managers select securities like stocks, bonds, or a mix of both.
• Investors can redeem their shares anytime and receive the value based on the fund's net asset value (NAV).

Examples of Mutual Funds in the Philippines

• Sun Life
• ATRAM
• ALFM
• Philam
• Philequity

Unit Investment Trust Funds (UITFs)

• Managed by banks, similar to mutual funds.
• Instead of shares, investors buy units of the trust.
• UITF investors do not become part-owners of the bank.
• Banks like BPI, PNB, and BDO offer UITFs that invest in bonds, stocks, and government securities.

Exchange-Traded Funds (ETFs)

• ETFs consist of a diversified portfolio of assets traded on the stock exchange.
• Shares of an ETF can be bought and sold throughout the day via the Philippine Stock Exchange (PSE).
• FMETF tracks the PSE Index (PSEi), providing exposure to the top 30 listed companies in the Philippines.

Minimum Investment Requirements

• Most mutual funds in the Philippines require a minimum initial investment of ₱1,000 to ₱5,000.
• UITFs generally have a minimum initial investment of ₱1,000, but some may require higher initial investments.
• ETFs require the purchase of at least one share.
• The price per share of FMETF ranges from ₱50 to ₱100, depending on market conditions, plus brokerage fees.
• Philequity Growth Fund (Mutual 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.
• Mutual funds pool money from multiple investors and invest in a range of assets, providing diversification.
• Stock investment example: Buying 100 shares of PLDT depends on PLDT’s stock price movements.
• Mutual fund investment example: Buying shares in a Philam Bond Fund offers diversification across different debt securities.

Mutual Funds vs. Unit Investment Trust Funds (UITFs)

• Mutual funds are managed by non-bank investment companies; investing in them means you buy shares of the company.
• You become a part-owner of the fund when investing in Mutual funds.
• UITFs are managed by banks, and instead of shares, you purchase units.
• UITF investors don’t become part-owners of the bank.
• Mutual Fund: If you invest in a Philequity Growth Fund, you own shares in the investment company, and the fund manager buys and sells assets.
• UITF: When investing in a BPI UITF Fund, you own units of the bank-managed pool, but you are not a part-owner of the bank itself.

Mutual Funds vs. Exchange-Traded Funds (ETFs)

• Mutual funds can only be purchased directly from the company managing the fund.
• ETFs are bought and sold like stocks on the stock exchange.
• Mutual Fund: To invest in a Sun Life Prosperity Fund, you subscribe directly through Sun Life’s platform or agents.
• ETF: FMETF can be bought or sold throughout the trading day via the Philippine Stock Exchange (PSE).

Similarities and Differences Between Mutual Funds, UITFs, and ETFs

Managed By

• Mutual Funds: Non-bank investment companies
• UITFs: Banks
• ETFs: Asset management companies

Regulated By

• Mutual Funds: Securities and Exchange Commission (SEC)
• UITFs: Bangko Sentral ng Pilipinas (BSP)
• ETFs: Securities and Exchange Commission (SEC)

Type of Investment

• Mutual Funds: Shares in the mutual fund company
• UITFs: Units in the trust fund
• ETFs: Shares listed on the stock exchange

Investment Strategy

• Mutual Funds: Actively managed portfolios, diversified
• UITFs: Actively or passively managed portfolios
• ETFs: Passively tracks a market index (e.g., PSEi)

Purchase Method

• Mutual Funds: Buy shares directly from the mutual fund
• UITFs: Buy units directly from the bank
• ETFs: Buy shares on the PSE via brokers

Minimum Investment

• Mutual Funds: ₱1,000 to ₱5,000
• UITFs: ₱1,000 minimum for most banks
• ETFs: Cost of a single share (around ₱50-₱100)

Liquidity

• Mutual Funds: Redeem shares at NAV (once a day)
• UITFs: Redeem units at NAVpu (once a day)
• ETFs: Traded throughout the day (like stocks)

Fees

• Mutual Funds: Management fees, front-end loads, exit fees
• UITFs: Management fees, no front-end loads
• ETFs: Low management fees, subject to brokerage fees

Risk Level

• Mutual Funds: Moderate to high risk depending on the fund
• UITFs: Moderate to low risk depending on asset types
• ETFs: Moderate to high risk depending on the asset mix

Taxation

• Mutual Funds: Taxable income, capital gains distributed
• UITFs: Taxable income, capital gains distributed
• ETFs: Taxable income, capital gains

How to Make Money from Mutual Funds, UITFs, and ETFs

• Capital Gains: NAV rises as securities in the fund increase in price.
  • Example: A BPI Equity UITF invests in stocks that increase in value, and the NAV goes up.
• Dividends: Funds distribute earnings from stocks or bonds as dividends.
  • Example: A mutual fund that holds PLDT stock may receive dividends from PLDT.
• Increased NAV: The value of assets in the fund rises.
  • Example: If the FMETF rises in value as the PSEi performs well, your investment’s NAV also increases.

Risk and Return Considerations

• Mutual Funds: Various funds with different risk levels offer both Equity and Bond funds.
• UITFs: Can be more stable, particularly bond UITFs.
• ETFs: Offer low-cost access to market indices but carry the risk of market volatility.
• Equity Mutual Funds perform well during a market rally but could lose value during a downturn.
• Bond Funds (UITFs) or Money Market Funds are better for conservative investors who prefer stable returns.

Which Is Better: UITFs, Mutual Funds, or ETFs?

UITFs

• Best for conservative investors who prefer lower fees and bank management.
• Pros: Lower management fees compared to mutual funds and good for conservative investors interested in bond or money market UITFs.
• Cons: Limited diversification and fewer fund options.
• BPI UITF Fixed Income Fund offers stable returns around 4% to 5% annually, investing in government and corporate bonds.

Mutual Funds

• Best for investors who want active management and are willing to pay slightly higher fees for diversification.
• Pros: Offers diversification across stocks, bonds, and money market instruments, and actively managed by fund managers.
• Cons: Higher management fees and less liquid than ETFs.
• Philequity Fund offers long-term growth with returns of 9-11% annually by investing in a diversified mix of equity and bond assets.

ETFs

• Best for passive investors who want low-cost investing with the ability to trade shares throughout the day.
• Pros: Low management fees and high liquidity.
• Cons: Limited to the stocks or index they track and may incur brokerage fees.
• FMETF tracks the PSEi with an annual return of around 7-8%.

Comparing Performance

• Mutual Funds (Active Management): Potentially higher returns with higher fees (8% to 12% annually for Equity Funds, 4% to 6% annually for Bond Funds).
• UITFs (Bank-Managed): Lower fees and generally safer but may offer lower returns (4% to 6% annually for Bond UITFs, 2% to 4% annually for Money Market UITFs).
• ETFs (Passive Investment): Offers low fees but depends on market index performance (6% to 8% annually for PSEi ETF).

Which Is Right for You?

• Choose UITFs if you want bank-managed funds with lower fees and prefer safer, low-risk investments.
• Choose Mutual Funds if you want a wide range of investments and are willing to pay slightly higher fees for professional management.
• Choose ETFs if you want low-cost investing with passive management and need liquidity.

Understanding Mutual Funds

• Mutual funds pool money from multiple investors for diversified portfolios managed by professional fund managers.
• They are ideal for people who lack the time or expertise to manage their investments directly.

How Mutual Funds Work

• Investors purchase shares in the fund.
• Fund managers invest the pooled money into various securities according to the fund’s objectives.
• The value of shares fluctuates based on the performance of the securities in the portfolio.

Advantages of Mutual Funds

• Diversification: Reduces risk by spreading investments across different asset classes and sectors.
• Professional Management: Managed by experts who research and select securities to optimize returns.
• Liquidity: Easily bought or sold, providing quick access to cash.
• Affordability: Investors can start with a relatively small amount of money.
• Convenience: No need to conduct extensive research on individual stocks or bonds.

Disadvantages of Mutual Funds

• Management Fees: Expense ratios (typically 0.5% to 2%) can reduce net returns.
• Potential for Underperformance: Some funds do not outperform the broader market.
• Lack of Control: Investors do not have a say in individual stock selection.
• Tax Inefficiency: Investors may owe taxes on distributions even if they don’t sell shares.

Example: How Mutual Funds Work

• An investment of $1,000 in a mutual fund with an 8% annual return grows over five years due to compound interest.

Net Asset Value (NAV)

• The Net Asset Value (NAV) represents the per-share value of a mutual fund.
• NAV helps track the performance of a mutual fund, and helps investors determine whether a fund is a good investment.

How to Calculate NAV

• Formula: NAV = (Total Assets - Liabilities) / Shares Outstanding
  • Total Assets: Value of all investments
  • Liabilities: Any debts or costs
  • Shares Outstanding: The number of mutual fund shares in circulation

Approaches to Determining NAV

• Daily NAV Calculation: Typically calculated once every business day after the market closes.
• Real-Time NAV: Some funds, especially ETFs, offer real-time NAVs, updated throughout the day.

Assets Under Management (AUM)

• Assets Under Management (AUM) refers to the total value of assets managed by the mutual fund.
• A larger AUM suggests more resources to diversify investments and potentially lower management fees.

Structure of Mutual Funds and Their Charges

• Fund Manager: Makes decisions about investments to buy or sell.
• Custodian: Holds the fund's assets for safekeeping.
• Distributor: Responsible for marketing and selling the fund to investors.
• Management Fees: Charged by the fund manager.
• Load Fees: Sales commission when buying or selling shares (front-end or back-end load).
• Expense Ratio: The annual cost of the fund, including management fees and administrative fees.
• Other Fees: Custodian fees, marketing fees, and transaction fees.

Weighing the Costs of Mutual Funds

• Expense Ratio: The percentage of your investment that the fund charges annually for management, administration, and operational costs.
• Types of Costs Included in Expense Ratios:
  • Management Fees: Paid to the fund manager.
  • Administrative Costs: Covers compliance, paperwork, and record-keeping.
  • Marketing Fees (12b-1 fees): Charged to promote the fund.
• Load Fees: Sales charges you pay when you buy or sell shares of a mutual fund.
  • Front-End Load: Paid when you purchase shares.
  • Back-End Load: Paid when you sell shares, often decreasing over time.
  • No-Load Funds: Funds with no sales charges.
• Turnover Ratio: Measures how often a fund’s investments are bought and sold within a year.
  • High turnover ratios mean more trading, which increases transaction costs and taxes for the fund.

How Costs Affect Returns

• High fees can significantly reduce long-term gains due to compounding.

Taxes, Dividends, and Distributions

• Dividends: Payouts from a company’s profits to its shareholders.
  • Qualified Dividends: Taxed at a lower rate (15% or 20%).
  • Non-Qualified Dividends: Taxed at your regular income tax rate.
• Capital Gains Distributions: When a mutual fund sells securities at a profit, it must distribute these gains to investors.
  • Short-Term Capital Gains: From securities held less than a year; taxed as ordinary income.
  • Long-Term Capital Gains: From securities held longer than a year; taxed at lower rates (0%, 15%, or 20%).
• Tax-Efficient Funds: Index funds and ETFs typically have low turnover, resulting in fewer taxable events.

Risk and Return Relationship

• Higher Risk = Higher Potential Return: Generally, the more risk you take on, the higher the potential reward.
• Risk Diversification: Mutual funds allow investors to diversify their portfolios, which helps spread out the risk.