Are Investment Fees Eroding Your Investment?
Irrespective of who is handling your investment portfolio, it is important that you review the performance of your investments regularly. While your primary focus will be on your investment return, be sure to review the investment fees, or internal expenses, of each of your investments too. These can vary tremendously and over a period of time and could be costing you a lot of money that should rather be working for you.
The fee structure for mutual funds is expressed as a percentage, which represents the cost of the administration and management of the mutual fund. So for example, if you invest $1,000 in a mutual fund charging a 0.5% investment fee, $5 would be allocated to internal expenses, whereas if your $1,000 is invested with a mutual fund charging 1.35%, the internal expense would be $13.50, and over time the difference can add up to a significant amount of money. Mutual funds exclude all fees when reporting their investment returns, so one may think that it is not necessary to be concerned with fees as long as the mutual fund you have invested in is producing investment returns on a par with its peers. This may be true to an extent in the good times, where you see your personal investment grow despite the higher fee. However, when the market turns bad, investment returns are harder to achieve and a mutual fund with higher expenses is likely to under perform in comparison with its peer group.
Fees will differ according to the type of mutual fund. An international mutual fund will generally have higher fees to cover the expense of the expertise of fund managers, as well as research and administration, while an index fund, which owns stocks represented by a specific index, will generally have lower fees because of not having to pay an investment professional to make investment decisions.
It is worth keeping in mind that high fee investment products tend to benefit the salesman rather than the client. So, as a rule of thumb, the higher the fees and commissions are, the less likely it is that the investment is in your best interests.