Effects of Charges and Fees on Your Investments

At some point, one has to pay for the services of running the investment. These charges include initial, ongoing and performance charges. Charges and fees have a negative impact on your investments and sometimes you can get lower returns. This is especially so during the early years of investments.

Initial Charge

This is a maximum amount taken from your money before you invest it in certain funds or unit classes. Initial charge, also called entry charge, caters for the cost of setting up your investment in that company. For example, if the initial charge is 5% and assuming you are investing $10,000, the company will deduct an initial charge of $500. This will leave you with $9,500 to invest.

Some funds have different buying and selling units. In this case, initial charges will be part of the price at which you buy. It takes into account spread. The spread is the difference between the prices at which one buys and sells the units. In some cases, the entry charge may be discounted. You should always check your ‘key investor information document’ to see whether the entry charge applies to that particular investment.

Ongoing Charge

You will be paying these charges annually as long as you hold your investment. Ongoing charges are usually quoted in the key investor information document. It accounts for the cost of running your investment and are usually deducted from your funds. Ongoing charges cover fund management fee (FMF). FMF includes investment management, accounting, valuation, audit fees, custodial fees, regulatory fees, and payment to legal and professional advisors.

Ongoing charges are taken from any profit the fund makes or from the fund capital. In addition, if the fund’s income is not enough to cover for the ongoing charges, part of the capital is reduce. This in turn reduces the fund’s capital potential growth.

Check the ‘key investor information document’ for more clarification to see what to expect in case you decide to invest.

Performance Fee

This is paid to the investment manager if your investment performs better than expected or as compared to the other similar funds. Investment manager only receives the percentage of the extra income as earlier agreed. The performance fee has a negative impact on the value of investment returns. In fact, all performance fees are part of the ongoing charges. The key investor information document will explain to you if a performance fee applies to your investment.

Are There Other Fees Involve?

Yes, and it’s important to be aware of them. Transaction fee accounts for the buying and selling the fund’s investment. Stamp duty reserved tax that goes to the government. There is also commission paid to stockbrokers for selling or for research.

To know if there are other fees, check ‘transaction cost and taxes’ document. Prospectus for each fund or investment should contain detailed explanation of all charges, all expenses involved, and commission given to stockbrokers.

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