Investors may be looking at mutual funds or UITFs but are they worth it? Let us talk about fees. 1% may seem like a small number but many probably don’t realize its full impact. Firstly, that is 1% of the NAV deducted every year. Relative to the dividend income, the percentage is much higher.

Let’s say I bought 100,000 units for P1 each for a total of P100,000. That investment has a dividend yield of 5% so I received P5000 in dividends for the first year. However I also paid the 1% fee or P1000. The P1000 fee that I paid is 20% of the P5000 dividend that I received! Am I willing to pay one-fifth of my income to the fund managers? Am I getting value for what I paid?

Bear with me as I continue this math exercise. In year 2, I now start with only 99,000 units worth P99,000. Let’s say it grew in value to P1.10 per unit so the NAV is worth P108,900. The 1% fee that I pay will be P1,089. Remember that I only have 99,000 units generating dividends now compared to last year so if the dividend per unit is the same, I will actually get less, around P4950. So in year 2, I now paid 22% of my dividend income as fees!

If I reinvested the P5000 dividend that I received last year, the NAV will now be P113,900 for which I will pay P1139 in fees and receive P5177 in dividends (if dividends per unit remain the same). Higher dividends and higher fees in a tug of war.

This is the effect of compounding fees working against your compounding dividend income. Over a long period, that 1% annual fee has a far greater impact than what you would assume.

Now I’m not against paying for service and I’m more than happy to pay as long as I’m getting my money’s worth. Time will tell if a mutual fund / UITFs fee is worth paying. If they can satisfactorily grow the fund both in terms of price appreciation and dividends, then their fee might be justifiable. The challenge is in identifying which funds can, if there are any at all.