“UITFs are professionally managed by a skilled investment portfolio manager or an Investment Company Adviser in the case of an MF and is usually affiliated with a large financial institution.”

Last week, we talked about investing in bonds. As we saw, there are quite a few things to consider when making an investment. What kind of a bond do we buy? Should it be a GS, LTNCD or a corporate bond? How long do we invest it for? Where do we buy these bonds? How is our investment protected? These are fairly complicated concerns for most of us, especially if we are just first-timers in investing in bonds. It’s like forming a selection of basketball players to make up what hopefully will be a championship team. You will need deep knowledge of the various skills and most certainly will need the help of a seasoned coach to make such a selection…hmm…shades of Tad Baldwin and the Ateneo Blue Eagles!

Fortunately we have an easier way to make an investment through mutual funds (MFs) and unit investment trust funds (UITFs). A mutual fund is an investment scheme or company that pools or aggregates money from a large number of investors for the purpose of making diversified investments for and on behalf of the investors. UITFs are basically the same as MFs, except that instead of dealing with an investment company, you participate through the trust department of a bank. The objective of these funds is to provide a safe, diversified and hopefully better return on our money compared to what we could achieve if we were to make the investments ourselves.

Why is it better than making the investment ourselves?

These funds are professionally managed by a skilled investment portfolio manager or an Investment Company Adviser in the case of an MF and is usually affiliated with a large financial institution like a universal bank, an insurance company or an investment house. In exchange for their services, a management fee is paid to the investment manager, which could range anywhere from ½ percent to 1.5 percent annually. An MF is registered and has to be approved by the Securities and Exchange Commission (SEC), while a UITF is supervised and regulated by the Bangko Sentral ng Pilipinas (BSP). The manager will have to clearly describe its proposed investment guidelines for the information of the investor-participants of the scheme. These guidelines will serve as a basis for the selection by the investment manager of the type of instruments and mix of maturities to ensure diversification of the portfolio.

Why are these funds able to generate a better return for us?

Diversification is the key consideration. A portfolio manager with a large amount of investible funds can spread out the risks among the different kinds of bonds available, thus providing a wide array of yields. Short-term T-bills are liquid or convertible to cash fairly quickly but earns low interest, while RTBs, LTNCDs and corporate bonds provide a much higher return but your funds are locked in for a longer term. The resulting basket of different securities should on the average provide you a better return. In a basketball team, it’s like having Lebron’s brute strength, Steph Curry’s shooting prowess and Kyrie Irving’s passing skills. And that diversification, folks, makes a championship dream team!

The investment funds in the local market are primarily open-end funds. When you wish to withdraw your money, the MFs and UITFs are obliged to redeem on demand your UITF participation units or MF shares based on the net asset value (NAV) of the basket of investment funds. The NAV is essentially the aggregate market value of the fund’s underlying securities calculated at the close of every market trading day.

These funds are NOT guaranteed by any private institution nor any government agency.

Your only comfort comes primarily from the pool of securities you participate in and the skill of the portfolio manager. The returns are not fixed and will vary depending on the market value of the underlying instruments. The management fees of the investment manager can vary from institution to institution. The track record of the funds in beating the market can be mixed – some great, some are not too great. The performance of the different funds are published in some newspapers and can be readily searched in the Internet. It is to your interest to shop around among the different fund managers.

A final point: there are, of course, funds that can provide you investment alternatives other than bonds. There are equity focused funds, for example…ahh…the stock market! Let’s talk about that next week. Until then, folks…One Big Fight!