Watch Out for Mutual Fund and UITF Fees and Expenses!

(This post discusses fees and charges made by mutual funds and UITFs based in the Philippines.)

So you have decided to invest your hard earned money into a mutual fund and/or a unit investment trust fund (UITF). Make sure you have read and understood each products’ prospectus or fact sheet before you sign the investment application and invest your money.

Make sure you understand the fees and expenses charged to you by the fund company for your mutual fund and the bank for your UITF.

Here are some of the charges for mutual funds:

  • Sales charge ranging from one to five percent of the invested amount. Typically, on the day you buy the fund your invested amount will purchase shares at net asset value (NAV) plus the sales charge. These charges apply every time you purchase additional shares. Fund families usually extend a discount if your total fund holdings across all other funds have reached a certain amount.
  • Redemption fees are charged by fund families when you sell your shares too soon or less than a specific holding period.  Some funds charge the redemption fee for up to two years of your investment.  Fees typically range between half a percent to three percent of the NAV at the day of redemption.
  • Investment advisory, distributor and administration fees are fees charged to the NAV of the fund on a daily basis. As the name suggests the fee covers the advisory, distribution or marketing and daily administration cost of the fund. The lower the fee the more efficient the fund is. If all things are equal always choose the fund with the lowest expense or fees ratio/percentage.  Some funds charge as high as two and a half percent (2.5%) higher than most American mutual funds.  However, some fund companies justify their high fees by saying that a more actively managed fund would incur more expenses as far as trading fees and commissions are concerned. 

Here are some of the charges for UITFs:

  • Sales charges are uncommon but there are a few companies charging a fee for UITFs. The highest I have seen so far is two percent of NAV per unit (NAVPU).
  • Redemption fees are charged by by UITFs but are typically about one to two percent if units are redeemed for less than 15 to 90 days.  However, it is not impossible for a UITF to have a longer minimum holding period.
  • Trust fees are the equivalent of the investment advisory and expense fees in UITFs.  I have noticed that UITFs have a lower fee than mutual funds.  Average trust fee is about one to one and a half percent (1 to 1.5%).

How are the two taxed?

As far as taxes are concerned, capital gains tax is not charged to mutual fund investors. Only when the fund distributes dividends wherein they are required by law to withhold twenty percent (20%) from the gross dividends.  This is probably the reason why Philippine mutual funds don’t give dividends.

UITFs follow the same rules on dividends, wherein there is a 20% mandatory withholding tax.  However, any gain arising from the difference in the buying and selling NAVPU is charged with a 20% withholding tax.

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