INVESTMENT IN THE UITF DOES NOT PROVIDE GUARANTEED RETURNS EVEN IF INVESTED IN GOVERNMENT SECURITIES AND HIGH-GRADE PRIME INVESTMENT OUTLETS. PRINCIPAL AND EARNINGS FROM INVESTMENT IN THE FUND CAN BE LOST IN WHOLE OR IN PART WHEN THE NAVPU AT THE TIME OF REDEMPTION IS LOWER THAN THE NAVPU AT THE TIME OF PARTICIPATION. Gains from investment is realized when the NAVpu at the time of redemption is higher than the NAVpu at the time of participation.
The UITF portfolio, being marked-to-market, is affected by changes in interest rates thereby affecting the value of fixed income investments such as bonds. Interest rate changes affect fixed income securities inversely, i.e. as interest rates rise, bond prices fall and when interest rates decline, bond prices rise. As the prices of bonds in a fund adjust to a rise in interest rates, the fund's unit price may decline.
LIQUIDITY RISK: This is the possibility for an investor to experience losses due to the inability to sell or convert assets into cash quickly or in instances where conversion to cash is possible but at a loss. It is caused by different reasons such as trading in securities with small or few outstanding issues, absence of buyers, limited buy/sell activity or underdeveloped capital market.
It also includes risk on a counterparty (a party that the Trustee trades with), defaulting on a contract to deliver its obligation either in cash or securities. This is the risk of losing value in the Fund in the event the borrower defaults on his obligation or in the case of counterparty, when it fails to deliver on the agreed trade. This decline in the value of the Fund happens because the default/failure would make price of the security go down and may make the security difficult to sell. As these happen, the Fund’s NAVPU will be affected by a decline in value.
In case of a foreign-currency denominated UITF or a peso denominated UITF allowed to invest in securities denominated in currencies other than its base currency, the UITF is also exposed to the following risks:
COUNTRY RISK: This is the possibility for an investor to experience losses arising from investments in securities issued by/in foreign countries due to the political, economic and social structures of such countries. There are risks in foreign investments due to the possible internal and external conflicts, currency devaluations, foreign ownership limitations and tax increases of the foreign country involved which are difficult to predict but must be taken into account in making such investments.
Likewise, brokerage commissions and other fees may be higher in foreign securities. Government supervision and regulation of foreign stock exchanges, currency markets, trading systems and brokers may be less than those in the Philippines. The procedures and rules governing foreign transactions and custody services may also involve delays in payment, delivery or recovery of investments.
In addition, participation in the UITF may also be further exposed to any actual or potential conflicts of interest in the handling of in-house or related party transactions by the UIT fund manager/Trustee. These transactions may include own-bank deposits; purchase of own-institution or affiliate obligations (e.g. stocks, mortgages); purchase of assets from or sales to own-institution, directors, officers, subsidiaries, affiliates or other related interests/parties; or purchases of sales between fiduciary/managed accounts.