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Are Mutual Funds and UITFs Good Investments?
“Hi Sir Good Morning! Would you like to invest in our new product? It’s called a mutual fund?”
“Huh? Mutual fund! Eh girlfriend nga wala pa ako. Sinong kasama ko sa mutual fund na yan?”
“No sir! You’re so funny ah! Okay, since you’re single, I think a UITF will be better.”
“Ano? Diba sakit yun? Yung masakit mag wiwi, tapos kailangan mo uminom ng maraming tubig?”
“Ahaha sir! You’re so makulit ah. No-no. Mutual funds and UITFs are a kind of investment that will help you grow your money. Here, watch this episode of Pinoy Money Academy so you’ll know what mutual funds and UITFS are! Happy learning!”
Hey everyone, J3 here from Pinoy Money Academy, and today you’re going to learn one of the most basic kinds of investments called Mutual Funds and UITFs. Every person, young or old, rich or poor, book smart or street smart, even for those not so smart should know what mutual funds and UITFs are and how they work.
Because once you know about Mutual Funds and UITFs, these are basic investment tools for becoming wealthy. Think of a carpenter. Isang karpentero. Ngayon ano ang basic tools na ginagamit ng karpentero? Their saw, nails and hammer, and possibly their ruler and pencil.
You should look at mutual funds and UITFs in the same way. If you want to become wealthy, you need to understand these very basic investment instruments called the Mutual Fund and UITFs.
To become wealthy, you need to understand investments like a carpenter understands his tools
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So with our corny jokes and intro out of the way, let’s get started!
What are Mutual Funds and UITFs?
Mutual Funds and UITFs are a kind of investment where money is pooled from investors, entrusted to a professional fund manager, then invested in a specific asset class.
Okay, that was a long definition, so let’s break it down into 3 parts.
First – It is a kind of investment where money is pooled from investors.
Meaning, yung pera ng mga tao, ay pinagsasama sama.
Second – The money is entrusted to a professional fund manager.
Meaning, yung pera ay i-bibigay sa isang professional manager na mag iinvest ng pera para sa mga tao.
The fund manager is professionally trained to know about investments, and where to best invest your money in.
Then third – The money is invested in a specific asset class.
Asset class just means, here the different investment options. So kung iinvest ba siya sa stock market, sa bonds, or sa short term deposits, or sa real estate, and so on and so forth. Maraming iba’t ibang klase ng asset class.
Now how does this work? Let’s go into an example.
Let’s say we have You. Myself. And another 100 people who want to invest. Now when we invest. The money is pooled together.
This pooled money is going to be given to a professional fund manager. Again this is a person who is an expert, a person who has the experience of investing. And the fund manager will be making the investment decisions like what specific company or asset to invest the money in.
Now where will the money be invested in? The money could be invested in stocks, bonds, or even real estate. IT would depend on what kind of fund you get. Because there are different kinds of mutual funds and UITFs. So may sub categories pa sila.
So how do you earn money?
An important thing to know about mutual funds and UITFs is that your earnings are NOT guaranteed. And the value of your investments will go up and down and up and down over time. But over the years, you can expect it to go up.
For example, here is a chart of just one of the values of a mutual fund over the past 10 years from Jan 2006 to December 2015.
As you can see it goes up and down, up and down, up and down through the years. But over the long run, it goes up.
Now, when people see a chart like this, two questions come to mind.
First is – what makes it go up and down?
The simple answer there is economic forces. Investors going in the Philippines, going out. Businesses earning money, government regulations, world events, recessions, basically anything that affects the economy. This is the reason why the exact value of your investment cannot be guaranteed. That’s why it goes up and down, because of so many different factors.
This is the primary advantage of investing via a mutual fund or a UITF – because you don’t need to understand these economic trends in depth. Your fund manager understands these things, and makes the investment decisions already to grow the money.
Think of it as just like riding a bus or a jeepney. Sa iyong biyahe, makakaramdam ka ng lubak. Yan yung ups and downs. And you might ask, bakit may lubak? Depende yan sa sandamakmak na factors. Maganda ba yung daan, traffic ba, may bigla bang sumingit? Go ba, stop ba? At iba pa. Ang maganda, hindi naman ikaw yung driver, kaya kahit hindi ka marunong mag drive, makakarating ka sa gusto mong puntahan.
Ganun din sa mutual funds at UITF. Kahit hindi mo masyado pa gets ang economic trends, yung fund manager will try to make money for you. But again, the fund manager cannot guarantee exactly how much you will earn, just like how the bus driver cannot guarantee kung kelan ka makakadating sa gusto mong puntahan. But you can trust your fund manager, that they will want your money to earn.
The second question people is ask is… So how do you exactly earn money?
To know how much you have earned, will depend on what’s called the NAVPS and NAVPU.
NAVPS means Net Asset Value Per Share / and NAVPU means Net Asset Value Per Unit. Pareho lang yang dalawang yan whether its per share or per unit. They mean the same thing.
Now the NAVPS is just an arbitrary number that was established at the beginning of the fund. It could be 1 Peso per share, it could be 10 pesos per share, it could be 300 pesos per share. That does not matter. Hindi porket, mura o mahal yung NAVPs eh maganda yun. Again – mataas o mababa na NAVPS, wala tayong pakialam. The NAVPS goes up and down over time. At ito yung halaga o yung worth ng isang share or unit nung investment.
So what do we look at?
The only thing that matters is the NAVPS of the fund when you buy it and when you sell it.
Let’s go into an example.
Let’s say that Fund A has a NAVPS of P10 per share. You invest P10,000, so bumili ka ng … P10,000 divided by P10 per share… for a total of 1,000 shares.
So ngayon you own 1,000 shares of Fund A.
Over time, aakyat at bababa yung NAVPS, posibleng maging 8 pesos per share, posibleng maging 12 pesos per share.
Now let’s just say after 2 years, let’s just say that the NAVPS is already 15 pesos.
How many shares do you own? 1000 shares diba?
So when you decide to sell your shares, meaning mag e-exit ka na from the mutual fund, magkano na yung halaga ng 1,000 shares mo?
1,000 shares x P15 per share… P15,000 pesos ang makukuha mo. So summing it up, you earned P5,000 from your investment.
Let’s have another example. This time with Fund B.
Let’s say Fund B has a NAVPS of P50 per share. You invest P10,000 also. So you get how many shares? P10,000 divided by 50 is, 200 shares.
So you now own 200 shares of Fund B.
Again the NAVPS goes up and down and up and down.
And let’s say after 2 years also, the NAVPS now becomes P75.
When you decide to sell, or exit from your investment, how much money will you get?
You owned 200 shares, and each share is now worth P75… for a total of P15,000!
So again, your P10,000 investment, earned P5,000.
So this is how you earn from mutual funds and UITFs. You buy. Then you sell later.
With these two examples, you can see that it doesn’t matter kung mataas or mababa yung NAVPS. Ang importante lang na tinitingnan natin ay kung magkano yung NAVPS nung bumili ka, at magkano yung NAVPS pag nag benta ka. That’s it.
At this point, I have to repeat myself. The NAVPs of mutual funds and uitfs are unpredictable. So your returns are NOT guaranteed. The NAVPS goes up and down, and up and down, because of so many economic factors. What you literally just have to do, is to buy… let the fund manager make the investment decisions to grow the NAVPS. And when you are happy with the returns, then sell and take your profits.
With this, let’s now answer the primary question of this episode. Are mutual funds and UITFs good investments?
Well It actually depends.
As we always teach here in Pinoy Money Academy, there are no perfect investments for everyone, but there are great investments that are suited for your specific goals. So it really depends on your specific goals if you should get a mutual fund or UITF, and what kind of fund you should get.
You see, there are many different kinds of mutual funds and UITFs. There are mutual funds that invest in stocks, there are mutual funds that invest in real estate, there are funds that invest in bonds, and others a mix of different assets. And these many different kinds of funds, well we’ll talk about them in another episode.
But to not leave you hanging, are mutual funds and UITFs good investments?
Our answer is YES.
Are mutual funds and UITFs good investments? Our answer is yes.
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Especially for beginners because it’s the fund manager that makes the investment decisions for you. All you have to do is, buy the fund. Wait and be patient for the NAVPs to go up. And sell when you’re happy with the profits. That’s it!
Of course there are many more things to learn about the different kinds of mutual funds and UITFs, and how to pick the right kind of fund according to your goals. Again, we’ll talk about that in a later episode.
For now, we hope you’ve understood how mutual funds work, how you make money, and know that mutual funds and UITFs are one of the simplest and basic investments you need in order to reach your financial goals.
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