For Thai tax-paying expats, contributing to Retirement Mutual Funds (RMFs) and Long-Term Equity Funds (LTFs) can be a good way to lower your annual Thai income tax bill (see our previous blog post, "Tax Saving Tips for Thailand Based Expats"). But with all the RMF and LTF choices in the market, how do you narrow your selection? Below are some tips that, when combined with Morningstar (Thailand)'s screening tools, can help you decide which RMF and LTF is right for you.
Asset Class Selection. RMF and LTF contributions are designed to be long-term investments, so they should be viewed as being part of your overall long-term investment portfolio and asset allocation. (For more detail on asset allocation, see our blog post, "What You Need to Know About Investing.") Therefore, when choosing an RMF and LTF, the first place to start is to decide the asset class(es) where you'll invest your RMF and LTF contributions.
As their name suggests, Long-Term Equity Funds (LTFs) invest entirely in Thai equity, or stocks listed on the Stock Exchange of Thailand (SET). However, RMFs can invest more broadly; some invest in equity (inside Thailand or in other markets) and others in fixed income. Some RMFs are balanced (a mixture of equity and fixed income) and still others invest in alternative asset classes such as gold. You'll want to coordinate the asset class of your RMF and LTF investments with the rest of your long-term portfolio. For example, if your target long-term allocation is a 5% allocation in emerging market investments, you won't want to make contributions that are effectively 10% of your total portfolio in just the Thai stock market. Since LTFs are only available for Thai equities, consider choosing other asset classes for your RMF contribution to remain diversified.
Using Morningstar (Thailand) to Select Asset Classes. To see the different asset class options that are available, go to the "Fund Screener" section of Morningstar (Thailand)'s website. Under "AIMC classification" you can select either "LTF" which will show you a list of all LTFs available, or "RMFEQ" (all RMF equity funds), "RMFFIX" (all RMF fixed income funds) , "RMFMIX" (all RMF balanced funds), or "RMFOTH" (all RMF alternative funds). Note that while most of the 25 RMFEQs invest in the Thai market, some invest in other markets (such as Tisco's Asia Pacific Ex-Japan and China-India RMFs).
Index Fund vs. Actively Managed. Another choice to make is whether to invest in an RMF or LTF with an active fund manager (who tries to beat a benchmark) or an index fund (one that has no active manager but is managed to perform in line with a benchmark or index). In Thailand, it's not always easy to tell the difference between the two, as many funds with active fund managers adopt a style of investing that is closer to index investing. Some clues you can use to distinguish between the two are that index funds will have lower overall fees, and their performance will most closely match a benchmark.
Whether you choose an active or index fund depends on whether you believe an active manager can consistently outperform their respective passively managed counterparts during your holding period, enough to justify their higher fees. Statistically, most active funds do not consistently outperform their passive counterparts over time. While there are some active managers that do, it can be hard to identify the successful ones in advance, and often successful active managers do not stay employed at the same fund over the long run.
Using Morningstar to Indicate Active vs. Passive. Unfortunately, the Morningstar (Thailand) site does not expressly state whether a fund is active or passively managed. However, you can use the Morningstar Rating™ system as an indicator of active or passive management. For example, the Morningstar star rating is a quantitative assessment of a fund's past performance as measured from one to five stars. Index funds that are passively managed will tend to be in the middle of the range (3 stars), while those with active management styles may fall anywhere between 1 star (underperformer) to 5 stars (outperformer). Keep in mind that a fund's recent outperformance of its respective index provides no indication of the fund's future performance.
Find Low-Cost Funds. You'll also want to choose RMFs and LTFs that have lower fees, as low fees generally mean that you'll get to keep more of the fund's performance. You can easily compare fund fees using Morningstar's fund screening tool. Note that there are three types of fees that fund management companies charge:
- Initial charge or front-end load (charged when you purchase the fund)
- Exit charge or back-end load (charged when you sell the fund)
- Total expense ratio (the annual charge, which includes management fees and other running expenses.
To compare fees, try using the Morningstar website to search for LTFs with no front or back load and less than 1% annual fees. You'll find two examples: TMBAM's JUMBO 25 Dividend Long-Term Equity Fund and TMBAM's JUMBO PLUS Dividend Long-Term Equity Fund. This compares to the other end of the spectrum, where you can find some LTFs with front- and back-end charges as high as 3% and total expense ratios as high as 2.5–3% per year. All things being equal, funds with high fees will have a difficult time doing as well as their lower-fee counterparts.
Special RMF and LTF Considerations for American Expats
Investing in RMFs and LTFs can make sense for American expats, depending on each person's unique situation and tax bracket. If you are a U.S. citizen, however, remember that you are taxed on worldwide earnings and compensation and that the Thai tax-advantaged status of the RMF and LTF will not recognized by the IRS. In addition, both the LTF and RMF are very likely to be considered Passive Foreign Investment Companies (PFICs). For more information, see "Tax Saving Tips for Thailand Based Expats" and "The IRS Never Sleeps: Taxes Americans Need to Know About Before Investing Offshore."
For many Thailand-based expats, the Thai tax benefits of LTFs and RMFs can be a great holiday gift to yourself. Once you understand the Thai tax benefits (and for Americans, the special U.S. tax considerations), try using the Morningstar Thailand website to select funds that make sense for your situation.
Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future. For more information visit http://crevelingandcreveling.com/.
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