Understanding Mutual Funds Fees

Depending on the company and fund we plan to invest, the percentage of fees varies:

1. Sales Load- Based on the fund I invested, the applicable sales load is 3.5%, it will go down a bit once the total investment amount reach 100K and so on. This means that by default, starting from my initial investment up to all my additional investment, the actual amount creditable for NAVPS  subscription will drop by 3.5%.

Say, our initial investment is PHP20,000 and the NAVPS by this time is around 2.000. Because of the 3.5% sales load, instead of acquiring a total of 10,000 subscription, it will drop to 9,650. This process will be the same on all our additional investment irregardless whether the fund is losing or gaining. 

In conclusion, if we sum up all our investment capital, the initial value will actually drop by the sales load rate charge and it also means that our capital will need to work 3.5% more for it to just break even.

This is just one of the factor that need to be considered before investing in mutual funds. The question I guess that we need to ask ourselves before we invest on a certain fund is whether it increases historically to a certain percentage where the sales load is way more than just being compensated.

2. Exit Fees - In the mutual fund that I invested, it charge 2% if I withdraw an amount within 1 year and 1.5% after 1 year to 2 years. Only after the 2nd year, if I plan to withdraw from my investment I won't be charge for the exit fee.

Should it happen that the fund is losing and we need to withdraw the amount within the two years of holding period, we're still going to be charged. That exit fee will add up to our loses.

3. Management Fee - The NAVPS value is derived from the formula:

 (Assets - Liabilities) ÷ outstanding shares ; this is calculated everyday. The management fee based on the mutual fund I invested is calculated as part of the liabilities. So, if the say they charge 1.5% management fee annually, in mathematical terms it can be expressed as: 

(Assets - (All other Liabilities+1.5% of Assets))÷outstanding shares. 

This is charged everyday irregardless whether the fund is losing or not but, I guess we won't feel this fee that much since it's part of the NAVPS computation where subscription is also based on.

Bottom line: Understand these fees before investing, these are usually shown in the mutual fund fact. By doing so, we can decide properly which type of fund we're going to subscribe that can possibly compensate these investment fees plus earnings .Take note though, I haven't factored in the effect of inflation, which is one or perhaps the most important factor in choosing the right mutual fund.

Disclaimer: This may not necessarily applicable to all mutual funds available in Philippines, this is based on the fund I invested which is from Philequity, the Dividend Yield Fund.