[Be the boss by choosing your own funds] A smart interpretation of the MPF expense ratio

The foundation of good management of MPF is to understand the performance of MPF funds and the level of fees. The performance of the fund cannot be calculated solely based on a very short period as the MPF is a long-term investment and there is little benefit being too concerned about short-term market fluctuations. In addition to returns, employees should also pay attention to the fund expense ratio, as this will directly affect the return on your MPF investment.

Make good use of the MPFA's "Price-Checking platform"

The MPF system has undergone 20 years and many innovations have been carried out. The MPFA is committed to increasing the transparency of the system. Among them, the "MPF Fund Platform" allows scheme members to compare the fees and performance of MPF funds more easily. The fund expense ratio is listed on the MPFA website and updated regularly. It discloses the main components of fund management fees: (1) administration fee, trustee fee and custodian fee, (2) investment management fee and (3) sponsor fee. Interpreting these "subdivided" charges helps members understand whether their investment and the services they receive are worthwhile.

Fund Expense Ratio (FER) shows the total amount of expenses charged by an MPF fund as a percentage of fund size. According to the information on the MPFA website, from July 2007 to November 2020, the average fund expense ratio of all constituent funds fell from 2.06% to 1.44%. In short, for every $100 invested in the fund by a member, $1.44 of it is an expense per year.These expenses mainly include management fees (including administration fees, trustee fee and custodian fee for trustees to operate the MPF scheme and the fees charged by investment manager(s), which are the major components of the fees and charges of a fund) and other special charges for particular types of funds.

Tips on funds comparison

It is worth mentioning that, FERs often vary by fund type; money market funds generally charge lower while equity funds usually have higher FERs. This is due to the differences in the complexity of managing these two types of funds.

Under an assumed rate of return of 5% and an FER of 1%, and your contribution amount is $1,000 at the beginning of 1st year, the net value of your holding of Fund A will be $1,040 at the end of 1st year after deducting $11 from your contributions. At the end of 5th year, your holdings in Fund A will grow up to $1,214 in value after netting the aggregate cost of $57 for 5 years. If you invest in Fund B whose FER is 2% and the rate of return is also assumed 5%, your holdings in Fund B will reach $1,029 in value at the end of 1st year given you need to bear a larger cost of $21. By the end of 5th year, the total cost will be $111 and the net value of your investment in Fund B will be $1,154. Given the On-going Cost Illustrations of Fund A are lower than that of Fund B, the dollar costs of investing in Fund A are consistently lower than Fund B, regardless of the length of your holding period.

 

Reference illustration:

Investment Period After

Fund A

(FER=1% per year)

Fund B

(FER=2% per year)

1 Year

$11

$21

3 Year

$33

$65

5 Year

$57

$111

 

 

Assumptions • Gross return = 5% per year • Contribution amount = $1,000 at the beginning of 1st Year
• All other direct charges (e.g. contribution charge, bid/offer spread, withdrawal charge) = Nil
P.S The above figures are rounded; kindly check with MPFA materials for details 

To conclude, scheme members are advised to take into account various factors when choosing MPF scheme(s) and fund(s). In addition to fees and charges, scheme members should also consider factors such as products (scheme and fund), range of services provided by trustees and their own personal factors. Hence, it is not advisable to select an MPF scheme or fund simply because of its lower fee.

 

Investment involves risks. This information is for general reference only. For details about the fees and charges of the MPF scheme and fund, please refer to the fee table in the relevant MPF Scheme Brochure.

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