How to Choose The Best Mutual Fund or UITF For You

How to Choose The Best Mutual Fund or UITF For You
Mutual Funds and UITFs are one the easiest investments we can make. Even with limited knowledge or funds, we can begin to take advantage of a bull-run in the stock market, invest in government bonds or invest in the highest-yielding time deposits.

However, with so many Mutual Funds and UITFs to choose from, how do we know which fund is right for us? In this article, we'll look at some of the factors to help us decide.

1. Legitimacy

This probably goes without saying. For Mutual Funds, you can check the Philippine Investment Funds Association. For UITFs, since they are bank products, do business only with banks that you trust.

The rest of the factors below can be found on the fund's prospectus or latest performance report.

2. Historical Performance

Look for terms like Annualized Performance, Calendar Year Performance and Annualized Return. The rule of thumb is: the higher the better.

Example: an Annualized Performance of 11% means it can get this much return in a year.
 
Now, this doesn't guarantee future performance, but it can show how competent the fund managers are and what can be reasonably expected. There's no use waiting to see if they can get you a 15% return in a year (for equity funds) if they've never done so before.

Note: For equity funds, if they rarely or never come close to surpassing or even matching the PSE Index, it might be a sign to look for a different fund.

3. Fees 

Look for terms like Sales Load, Administrative fees, Advisory fees, or Management fees. The rule of thumb is: the lower the better.

High-performing funds might charge more, so it's not just about choosing from the funds with the lowest fees. It's best to weigh this along with historical performance. The goal is to compute how much those returns really are after the fees are subtracted. (Some funds may have factored in the fees already, but it's best to ask unless they explicitly stated otherwise.)

4. Affordability

Look for terms like Minimum Initial Investment and Minimum Transaction. The rule of thumb is: The lower the better.

Minimum initial investment is the money to avail of or participate in the fund. Minimum Transaction is the money you can place (or "deposit") for each succeeding transaction.

It's important to make sure you can afford both, so you can invest regularly.

It's better to deposit 1000 per month rather than invest 5,000 every five months. That way you can invest regularly and make the small amount grow now, rather than wait for a long period of time while the money waits in a savings account.

5. Penalties

Look for terms like Early Redemption Fee and Holding Period. Rule of thumb: Just make sure not to withdraw earlier than prescribed.

There's a penalty for withdrawing your money too early. Holding Period is how long you have to wait before taking back your money. Early Redemption fee is how much you have to pay as penalty, if you don't wait the  prescribed amount of time.

Example:
- Holding Period: 180 Calendar days
- Early Redemption Fee: 1.00%
- If you withdraw on day 179, your 10,000 initial investment will become just 9900 (if it grew 0%).

6. Accesibility (hat tip to Startup Mom for pointing this out)


How easy it is to invest and re-invest in the fund? Is it near your place of work (since that's where you typically are during the day)? Can you do it online? Can you pay through bank transactions or other secure money transfers?

The less hassle, the better. Although you shouldn't let people get in the way of bettering your financial future, it's still easier to do so if all you have to contend with is yourself.

So what the most important factor (aside from a legitimacy of the fund)? My suggested order of importance is:

1. Volatility. Surprised? You shouldn't be. There are different kinds of investors and investment objectives. But this doesn't mean the least volatile equity fund is the best. Instead choose among the 4 basic types: equity, balanced, bonds, and money market.

2. Historical Performance and Fees. But just barely. It's almost a tie with the third, but since growing money is the main objective, this is more important.

3. Affordability. Investing is more of a long-term, regular habit. If you have to wait 5 or 6 months to invest, you're waiting 5 to 6 months before your money grows. But with affordable initial investment and minimum transaction amounts, you can start growing your money right away.

4. Accessibility. At first look, this shouldn't matter much. After all, the money should sit in the fund for some time, so there's no need to keep going back to the bank or fund company. But then most employees tend to be busy in their work, and even single people can have very hectic personal lives. So it's important to think of this pragmatically: You could gain several percentage points more per year, but if the trade-off is you can't regularly invest each payday (or whenever your schedule is), it might not be that profitable in the long run since the additional funds you place yourself are a big part of the early gains you get.

5. Penalty. If there were other factors to consider, this would be even further down the list. It's important to remember not to invest in anything that does not fit your investment objective or risk appetite. If you follow that, there would be no need to withdraw early (that's what an emergency fund is for).


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6 comments:

  1. Hi, can i also suggest "Accessibility" in choosing the best uitfs or mutual funds? i think it's a plus factor for companies who make it easier for their investors to open an account and redeem funds through online transactions! For employed persons, personally going to the bank or other offices takes too much time and effort.

    ReplyDelete
    Replies
    1. Good point. Especially since I hear some mutual funds require a ton of paper work. Thanks for the tip!

      Delete
  2. Hi Carlos - Can you give me some insight on the possibility that the market will correct itself?

    ReplyDelete
    Replies
    1. Hi Anonymous,

      I can say it's definitely possible. But I guess you're really asking "when".

      Well, there's no predicting when. There are lots of reason to sell or invest in other assets other than equities. But it would be irresponsible of me to speculate without proof or clear indicators to back it up.

      If you're in stocks for the long-term though, cost averaging can help cope with a correction. If you're a short-term trader, I'm afraid I'm not skilled enough with that to give you useful advice.

      Delete
  3. Hi,

    Can you also do an article about the main differences, advantages, disadvantages of both MFs and UITFs please? So we can determine for ourselves which one is a better fit for our individual needs. Thank you!

    ReplyDelete
    Replies
    1. Hi Jon,

      sure, that's a good idea. I'll write an article about that.

      Delete