Here's what I found out:
1. Management Fees
A whopping 1.5% to 5% per year. How can someone earn money by holding other people's money without adding value is beyond my understanding. Comparing other country's mutual funds like Vanguard which is a decent 0.20% per year. Mutual funds are charging too much for management fees for copying the index and underperforming.
2. Sales Load
When you invest in a mutual fund, the money you deposit gets reduced. Because you need to pay what they call sales load. Like remitting money, you need to pay a fee to place your money into the fund. The fee is not more than 1% depending on the amount of money you invest.
3. Tax Exemption is a Lie
The main selling point of mutual funds is that it is tax exempt. And it is. But its not a complete answer. The reason it is tax exempt is because so that you will not be taxed twice. You see, when you give your money to a mutual fund, the manager makes the purchase of stocks, he gets taxed. But you pay the tax using the money he got from you and from other people. So in other words, you got taxed already. So its safe to say that the money you got in your mutual fund is tax exempt. Only because you already got taxed in the transaction and to avoid double taxing.
4. No Value, Mediocre Return
Being an investor, I would like to see value for my money. But seeing how mutual fund companies invest, I come to realize that they are not adding value to the money I gave them. How hard is it to copy the composition of the index? Its publicly available, and then you charge me 5% per year just because you copied it? And if they do decide to stray away from index funds, they underperform the market.
5. Exit Commission
In trading, there's a term called spread. A spread is the difference of the real price of a currency when you buy or sell it. So for example, if you trade your PHP to USD which is 43.57 (real price) you can make a transaction for that price, but the broker will add a spread to make money. Usually 1 pip. So you pay 43.58 instead of 43.57. When I encashed my shares. Hoping to exit the fund. I realized that the real price of the fund is no where near the price I paid for the exit. They paid me P10 less than the real market price. It is a 1000 pip spread!!! This blew my mind!
Conclusion
Doing the math, if I have P1,000,000 in invested money. Put it in a mutual fund, I'll get a sales load commission, lets say 0.2% for every P30,000 / month deposit. My money will be deducted by P720 per year. Then I'll have 1.5% management fee per year that's less P15,000 / year. P55,000 / year for 5.5% management fee mutual funds. Then I got the exit depending on the size of my fund, P20,657.
And I held the fund for 5 years, at 1.5% management fee. With 40% yield for 5 years or 8% per year. Using the hypothetical P1M amount.
Let's break it down:
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1st year: Starting Capital P1M
+ P30,000 x 12 (monthly deposit)
= 1,360,000
+ 8% mutual fund return
= 1,468,800
Expense:
- 1.5% management fee (P22,032) (compute your fund if 5.5% management fee)
= P1,446,768
- 0.2% sales load (P720)
= 1,446,048
- P20,657 (exit commission) (1000 spread)
= 1,425,391
Invested money: 1,360,000
Bottom line: P1,425,391
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My net yield :
4.81% per year
or 1.91% with inflation (2.9% October 2013)
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A net yield of 4.81% per year once I encash the money. Just like the return of a treasury bond. Why go mutual fund if bonds are the same with virtually no risk?
I therefore conclude that mutual funds are not good investments and returns are comparable to bonds. But bonds are better because it has lesser risk than a mutual fund.
With 1.91% yield, it is not an acceptable return on your investment.
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