China is one of the worst markets for fund investors because of its high fees and restrictive market environment, according to new research.

The country was awarded the lowest grade in a worldwide survey of markets which analysed the key factors which make buying a fund a worthwhile investment.

But Korea was given top marks and named as one of the best countries in the world for fund investors, alongside the US.

Research house Morningstar reviewed 25 countries across North America, Europe, Asia and Africa based on four categories: regulation and taxation, disclosure, fees and expenses, and sales and media practices.

Morningstar gave China the lowest score at D+ because of its high fees and restrictive market environment.  In terms of regulation and taxation, China is average compared to other markets. Its disclosure policy is generally thorough, providing quarterly funds reports and disclosing the name and tenure of portfolio managers.

However, China does not calculate official fund expense ratios, complained Morningstar, which makes it challenging to compare total costs effectively. Morningstar made an error in calculating the expense ratio of China funds in 2013 and when it corrected the calculation this year, it found that China fees were among the highest in the survey.

While China has taken steps to open up the market, it does not allow foreign domiciled funds (except from Hong Kong through the mutual recognition fund scheme effective July 1) to apply for sale within China. Chinese funds also need permission to invest assets overseas.

The United States achieved the highest rating for the fourth time in a row in Morningstar's biennial Global Fund Investor Experience report because the market charges low fees and provides full disclosure to mutual fund investors. But this is the first time that Korea has scored an A grade.

According to the 2015 report, Korea achieved above-average scores in all four categories but it scored the highest in regulation and taxation.

Seoul updated regulations in a timely manner and implemented them effectively, Morningstar said. And while soft dollars are used for research, the research is not specifically tied to a particular fund. Additionally, Korea also fared well on taxes as it did not impose capital gains taxes on passive investments.

Morningstar also noted that mutual fund fees were better in Korea as it did not charge investors any performance fees. Few funds charged front loads though most advisers were still compensated through trail commissions. 

Korea's sales and media practices have improved with the launch of online fund supermarkets. Like other markets in Asia, large institutions dominated fund sales and advisers often favoured in-house funds. Regulators in Korea offset this by limiting the sale of funds provided by integrated asset management companies to less than 50% of total sales.

Singapore gained a C grade. Morningstar said the market had no major weaknesses but it was more expensive compared to other markets, and disclosure practices had room for improvement.  Investors pay for advice through a front load or ongoing expenses embedded in expense ratios, which lead to a low level of transparency around the cost of advice.

Hong Kong
Hong Kong has been giving investors a below-average experience with fees and expenses dragging its overall score down. Locally-domiciled funds had lower expense ratios but these made up a small proportion of the overall market. Most advice fees continue to be paid through the combination of front loads and trailing commissions. Furthermore, investors do not have the flexibility to forgo these loads and trailing commissions altogether even when purchasing funds without advice.

In terms of disclosure, there are a few areas for improvement. Unlike most other markets, Hong Kong does not institute the same disclosure requirements for mutual funds and other types of funds. Hong Kong fund documents also provide little information about managers.

Taiwan has one of the most favourable tax policies in the survey. There are no taxes on capital gains, and there are tax incentives for investing in the public pension fund, although these incentives are not available for ordinary mutual funds.

Fees for funds available for sale to investors in Taiwan are among the highest in the survey. It is difficult for investors in Taiwan to invest in funds without front loads or trailing commissions; in fact, Taiwan has the highest reported instance of front loads on funds in this study.

With favourable policies such as tax exemptions on capital gains and a tax credit for investment in long-term (five years or more) equity investments, Thailand fared the best in this survey when it came to taxation. The tax credit, in particular, is a boon to investors and results in an after-tax return even higher than the pre-tax return in Morningstar’s hypothetical tax scenario calculated for all countries in the survey.

Regulations in Thailand are not as strong in a relative sense, and Thailand is one of the few countries that places restrictions on funds investing in foreign securities.

Asia-Pacific markets' grades:

Korea : A

Taiwan: A-

India and Thailand: C+

Hong Kong and Singapore: C

Japan: C-

China: D+