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EXPLAINER: How mutual funds and UITFs make investing beginner-friendly

Lance Spencer Yu
EXPLAINER: How mutual funds and UITFs make investing beginner-friendly

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If you're overwhelmed by building your own stock market portfolio, investing in a mutual fund or UITF may be the be best way to start

MANILA, Philippines – Let’s face it: it’s tough to invest in stocks. Even if you’ve already brushed up on the basics of the stock market, choosing which among the almost 300 publicly listed companies to invest in may overwhelm you.

Do you want to invest in media giants? How about the real estate developers behind the malls and condominiums sprouting around the country? Maybe you want something smaller: fresh meat suppliers, coffee shop chains, or fruit shake kiosks?

Knowing the ins and outs of all those industries is already a job of its own. After that, you still need to know how the company you’re eyeing is faring within that industry, and how their future financial performance might look like. Then, you still have to decide when would be the best time to buy the stock and sell it. How would the average investor have the time to handle all of that?

“You would have to study the market yourself and figure out where you’re going to invest. If in stocks or bonds, you have to figure out which company or which issuer are you going to go through,” lawyer Rene B. Betita, an independent director for Manulife Investments and faculty member of the finance department of De La Salle University, told Rappler. Betita has been in the trust industry for around 25 years.

Fortunately, there are other options that still allow you to invest in stocks while benefiting from expert management. They’re called mutual funds and unit investment trust funds (UITFs).

Let’s break them down.

What are these funds?

The portfolios of mutual funds and UITFs can have everything from stocks, bonds, and foreign currency. Here, we’ll focus on equity funds, or mutual funds and UITFs that primarily contain stocks.

But first, here’s a handy recap on stocks. Remember, stocks represent an ownership interest in a company. To get that slice of ownership, an investor would buy shares of the company’s stock. Investors normally transact with a stockbroker, who serves as the intermediary linking investors with the Philippine Stock Exchange (PSE), which is the organized marketplace where stockbrokers trade stocks.

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So how do these equity funds come into the picture? Rather than invest individually, investors pool their money into one collective fund to achieve a specific investment objective. The fund manager then uses this massive amount of cash to invest in a diverse portfolio, rather than just putting it in a single stock.

“With a collective investment scheme, there’s a portfolio manager who actually does everything for you,” Betita said. “For the newbie investor, it means that you don’t have to really figure out or study the market, or look at the inherent risks because those things are supposed to be explained to you by whoever it is that’s trying to get your investment.”

“All you have to do is decide which fund that you want to get into and then get your return, and it’s up to you when to get your return,” he added.

If you want to participate in an equity fund, the process is similar to the way that you usually invest in the stock market. But this time, rather than buying a share of a PSE-listed company, you are buying a share or unit of the equity fund you want to join. The price of this share or unit, called a net asset value per share or unit, behaves like a stock’s share price. It goes up and down depending on how the fund and the stocks inside it perform.

Now that we understand what these funds are in general, what’s the difference between a mutual fund and a UITF? Actually, not much. The biggest difference is the fund’s management. Mutual funds are handled by investment and insurance companies, which are supervised by the Securities and Exchange Commission. Meanwhile, UITFs are managed by trust entities, most commonly banks, which are supervised by the Bangko Sentral ng Pilipinas. Aside from regulatory differences, the two operate in a comparable way.

Funds for every investor

So what makes investing in these funds better than individual stocks? There are two main reasons: tailored portfolios and diversification.

For the first benefit, recall that every mutual fund and UITF is guided by its declared investment objective. A fund can choose the kind of investments it carries to reflect a level of risk. They can also outline specific focuses, like healthcare, technology, or infrastructure.

“Let’s say you only want to invest in blue chip securities. There’s a fund for that. You want to invest in a little bit more speculative investments? There are funds for that. If you want to invest in real estate investment trust outside the Philippines, there are funds for that,” Betita said.

This means that if you’re a risk-taker, you can invest in an aggressive fund that finds volatile but promising stocks. On the other hand, you might want to invest in an environmental, social, and governance fund. The bottom line is that mutual funds and UITFs save you the tough process of researching and constructing your own portfolio as a beginning investor.

Diversifying your portfolio

This brings us to diversification. It’s not only difficult to find out which stocks suit you, it’s also costly. That’s because even if you want to diversify by buying multiple stocks, you can’t just buy a single share of each stock.

Like other stock exchanges, the PSE has a board lot system. To start investing in a company, you would have to buy a minimum amount of shares, which changes depending on the market price of the stock.

For example, if you want to invest in a company whose stock price is P0.50 per share, you would need to buy at least 1,000 shares. With these minimum investment requirements, replicating a portfolio that mirrors the PSE index (PSEi), for example, would take quite a lot of capital.

Mutual funds and UITFs eliminate this worry. When you purchase a share or unit of a fund, you essentially get a slice of its entire investment portfolio. And it’s a far more affordable form of diversification too. For instance, some index funds allow you to invest as little as P1,000, and that would allow you to track the performance of every stock in the PSEi.

“There are funds that allow initial placements as low as P1,000, and it gives the small investor an opportunity to access high grade securities that cannot normally be accessed by somebody who has something less than P100 million,” Betita said.

How do I start?

Here are some general considerations as you select a fund to invest in:

  1. Set your goals. Before even searching for a fund, you must know what you want to get out of your investment. Outline the amount that you’re willing to risk and your time horizon. Because mutual funds and UITFs invest primarily in stocks, these funds often recommend a time horizon of at least three to five years to see good returns.
  2. Establish your risk profile and focus. This will help you choose what kind of fund and underlying investments you go for. Most mutual funds and UITFs will have disclosures and risk assessment tests that aid you in deciding if the fund suits you.
  3. Know the technicalities of the fund. Minimum initial investment amounts needed vary between funds, as does the minimum top up. Also take note of the minimum holding period, early redemption fee, and annual management fee. You can find these technicalities detailed in your mutual fund’s fund fact sheet or your UITF’s key investment and information disclosure statement.
  4. Choose your fund. In choosing a fund, Betita advises beginners to focus on the reputation of the institution, as well as its historical performance, though this does not necessarily predict future success. When deciding between a mutual fund and UITF, keep in mind that some mutual funds charge an upfront fee that banks do not.
  5. Open an account. Once you choose your fund, it’s time to open an account. This often requires an in-person visit to the financial institution. Because of that, it tends to be easier to open a UITF account than a mutual fund account since banks tend to have significantly more branches. Opening a UITF account with a bank that you already have a relationship with may also reduce the paperwork that you need to fill out.

Although mutual funds and UITFs benefit from diversification, they still carry risk. Because of this, Betita advised investors to start with a fund that focuses on something that they’re already familiar with. Jumping straight into a fund that invests in foreign securities, for instance, would add another layer of risk in terms of foreign exchange fluctuations.

Always keep in mind that your return may vary, and there’s no guarantee that fund managers can constantly beat benchmarks like the PSEi. For investors that want more control over their portfolio, they may instead opt to open a stock brokerage account. – Rappler.com

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