Charges on many investment funds have recently soared, which can be a real drag on your profits. But if you’ve started to glaze over at the thought of investments, wake up – if you’ve got a pension, this affects you too.
Whenever you buy something, there’s a clear relationship between price and quality. The more I spend on a TV, the better the picture should be. The more expensive the pair of jeans, the better the cut and look.
When it comes to putting your money into an investment fund, the same thinking has always been applied. You want top performance? You’ve got to pay top dollar for a star fund manager to do it for you.
And boy, have they been charging you. Recent research by Lipper found that of all the funds that have changed their charging structures over the past 10 years, 9 out of 10 have increased their charges (by an average of 0.3%).
So, despite funds growing in size (meaning managers are earning more dosh) and knowing what impact charges have on returns, managers have been putting their fees up.
Does the cost pay off?
I worry, though, that people don’t realise what impact charges have on performance. An increase of 0.3% sounds like pittance, doesn’t it? And when you add that to the annual charge of an investment fund, around 1.5%, it still doesn’t seem too high.
But the reality is that in the long-term, high charges steadily eat away at your returns:
- If you invest £10,000 over 20 years, and it grows by 5% a year, you’d end up with £26,532.
- A fund charging 1.5% would leave you with £19,890, so you’ve spent £6,635 in charges.
- A 0.3% increase would leave you with £18,770 – you’ve paid out over £7,500 in charges.
That’s nearly half of the money you’ve made being sucked up into a fund manger’s pocket!
This affects us all
With what’s going on in the economy at the moment, you might not be investing at all, and so think this doesn’t apply you. But believe me it does. If you’re saving for your retirement through a pension, you are investing in funds. So your hope of having comfort in later life may well be evaporating through these high charges.
So, if you have a pension, or a stocks and shares Isa, do you know how much your investment costs you every year? Do you even know where to find out the charges you’re paying? And ultimately, if your investments grow, do you even care about how much they cost?