• Wed. Nov 25th, 2020

The Obsession Of Keeping Investment Costs Low Explained

You are about to start investing your hard earned money, obviously you want to get the greatest returns on your money.

Keeping your investment costs low is vital. Investment expenses come directly from your investment return, and over the long-term eat into your wealth accumulation.

So before you invest read everything about the fund to understand all the fees and figure out how it will effect your potential earnings..

Investment Costs You Must Know About

Broker fee, the upfront sales commission and is know in the investment world as the sale load.

How the sales load works. The fund investor when he buys into the fund he pays the “load”, This money is used to pay the sales intermediary, such as a broker, financial planner or investment advisor, for his time spent assisting you make your choice.

The load is either paid up front at the time of purchase (front-end load), when the shares are sold (back-end load), or as long as the fund is held by the investor this is an annual load and is referred to as a (level-load).

Load funds Contrasted With No-load Funds

When you or your fund manager buys a load-fund from a broker you can expect upfront 5% sales load, or a sliding scale redemption fee, accompanied with an additional 1% annual  fee. Of course if you have a fund manager they to have fees.

You can avoid sales commissions by avoiding broker sold load funds.  You can invest in a no-load mutual fund directly from a no-load investment management company.

Expense Ratio

All funds have operating expenses including no load funds. These are included in a fund’s expense ratio. Such as the transactional costs when they buy and sell securities (stocks).

They incur costs for administering and managing an investment portfolio. These expenses accrue daily, and are expressed as a percentage of portfolio net assets. This percentage figure is known as the expense ratio.

The Investment Company Institute publishes every mutual funds expense ratios in annual yearbooks. They provide expense ratio data for the average mutual fund, as well as  the average expense ratio for dollar-weighted investor holdings in mutual funds. Sample chart.

What It Can Cost You High Fees

Below is the difference a .65% can cost you over 30 years. Shockingly its almost a $100,000 difference or almost the same amount as your initial investment.

An initial $100,000 investment growing at an annual compound return of 6% will produce a terminal value of $574,349 after 30 years.

  • A low-cost fund with a 0.25% expense ratio will accrue $532, 899 after 30 years
  • A higher-cost fund with a 0.90% expense ratio will accrue $438,976 after 30 years.

The low-cost fund consumes 7.22% of the thirty year accumulation . The higher-cost fund consumes 23.57% of the thirty year accumulation.

Of course this is if they earn at the same rate of 6%. So look at the returns of the past though its no guarantee for the future. Subtract costs and returns and you will know exactly where you want to put your money.

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Hope you enjoyed and don’t forget to share with two friends,

Binyomin Terebelo

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