UITF (Part 5): The Fees, Charges and Tax of UITF

July 12, 2013 | Posted by: Moneymax | Personal Finance

July 12, 2013


We have all heard the saying, there’s no such thing as a free lunch. Let’s have a look at the type of fees that an UITF investor may have to face.

The Trust Fees of UITF

One of the enticing benefits offered by Unit Investment Trust Fund (UITF) products is the professional fund management. The fund managers are entrusted to track the market daily and make sound investment decisions to diversify the UITF portfolios, in order to achieve maximum capital gains. They are well-experienced full time experts with vast knowledge in researching, managing and administrating the UITF portfolios. However, it’s a real pain in the neck to pay in exchange for their expertise.

Read more: How to Invest in Mutual Funds in the Philippines

Nonetheless, the trust fees are affordable and reasonable. Trust fees are similar to the investment advisory, distributor and administration fees of the Mutual Funds. Investors of UITF products are required to pay the trust fees at only the percentage of the Net Asset Value of the fund. The percentage normally ranges from 1.0% to 1.5% per year.

The Early Redemption Fees of UITF

UITFs do not have maturity date, thus investors can redeem their money at any time. However, UITFs are designed to be a medium to long-term investment schemes. Hence, a minimum holding period is prescribed by the banks to encourage investors to invest for longer durations in order to mitigate the negative effect of market volatility to the overall financial health of UITF portfolios. The minimum holding periods range from 0 to 90 days or maybe longer. It depends on the type of the UITF and the policies of the banks.
As for the UITFs offered by the Bank of the Philippines Islands (BPI), there is no minimum holding period. Thus, investors can avail themselves of the better liquidity and make redemptions whenever they want to, without fearing the early redemption fees.

The Custodianship Fees of UITF

Custodianship fees are charged by the banks which hold the securities within the UITF portfolio, and offering a variety of other services such as account administrations, transaction settlements and interest payments. For instance, the Odyssey Peso Bond Fund of the BPI charges 0.002% custodianship fees out of the average of daily Net Asset Value (NAV) per quarter.

The Sales Charge of UITF

A sales charge is the commission paid by an investor to ‘‘compensate’’ the trustees/fund managers for their efforts in actively managing the UITF portfolio and making profits.

For UITFs that carry sales charges, investors must be aware that there are three classes of shares. The letter designations indicate when an investor should pay the charges. The Class A shares (front-end loan) require the investors pay the sales charges at the time of purchase. For Class B shares (back-end loan), the charges are paid when the shares are sold while Class C shareholders pay the sales charge on a regular basis until they redeem their fund.

Sales charges are commonly seen in Mutual Funds and rarely seen in UITFs. However, there are several banks impose sales charges on their UITF investors. Generally, the sales charges range from 0% to 2% of the Net Asset Value Per Unit (NAVPU).

The Withholding Tax of UITF

As open-ended trust funds, UITFs are redeemable at any time upon the request of the investors. Hence, UITFs do not comply with the features of long-term investments which will qualify an individual investor for tax exemption.

UITF products are subjected to 20% withholding tax on the capital gains. However, an investor only has to pay the withholding tax when he redeems his money. The tax amount only depends on the gains arising from the difference in the buying and selling NAVPU instead of the period of investment.

According to BIR Ruling No. 003-05, UITFs upon redemption are no longer subject to the 20% withholding tax if applicable taxes have already been paid on the UITF investments. Thus, separate tax would not be imposed upon redemption of UITFs, since the proper taxes have already been collected through the final 20% withholding tax system.

As you might expect, the fees and expenses of UITFs vary according to the type of funds. Each bank imposes different rate of charges on the UITF investors according to its own policy. The fees and charges are as important as other factors such as investment objective, liquidity requirement and risk profile in your decision making for the right investment scheme. Think twice before you leap!

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