If only Unit Investment Trust Fund (UITF) investors matched their investment horizon with the UITFs they got into, the decline in UITF prices during the summer of 2006 would not have been that bad.
This is according to the Trust Officers Association of the Philippines (TOAP) who believes increasing interest rates was not the only factor that pulled down the net asset value per unit (NAVPU) of UITFs early this year. The panic selling of investors who were frightened by the falling prices also contributed to the UITF shakedown, the TOAP explains.
In an article in the www.uitf.com.ph site, the TOAP explains that:
someone who has short-term constraints should only consider funds invested in short-dated assets, such as Money Market Funds, to minimize, if not altogether avoid, experiencing the kind of volatility commonly associated with longer-dated instruments.
On the same note, one who has the financial capability to leave investments untouched for a long period of time can enjoy the luxury of investing in higher-yeld, longer-term investment products.
An investor whose funding needs coincide with a longer-term perspective has the luxury to opt for UITFs that maintain long durations and thereby enjoy the possibility of reaping bigger rewards as a trade-off for the risk he should be prepared to take relative to such a stance.
A useful analogy is related to the use of loans. It would be disastrous to take a 6-month loan if the loaned funds would be used in a business or investment that returns a profit only after 12 months. Similarly, there are associated opportunity costs when funds that can be left untouched for five years are invested in a financial product that matures every 3 months.
The moral of the story: Match your investment horizon with the investment product you want to invest in. In layman's terms: If you need money in the short-term, invest only in short-term funds. If you won't be needing it in the long-term, put it in long-term funds.