Mutual funds: how costs kill returns
The main reason why those who invest in Mutual Funds do not achieve the expected returns is the weight of commissions! The total costs associated with investing in an Italian mutual fund are, therefore, estimated at an average of 1.58% per annum of the total assets of the funds over the period 2006-2016, with a value of 1.74% at the end of 2016.
Subtracted costs, therefore, the average annual return is reduced from 3.5 to 2%. At the end of 2016, these costs (1.74% on average) now accounted for half the amount of fees! The great thing, at least for banks and managers of these investment products, is that they always take those commissions even when they have been so good that you do not earn anything or even when they have been even better and have caused you losses.
HOW DO YOU CALCULATE COMMISSIONS?
The commissions on funds are, therefore, the variable that weighs the most in killing investment returns. Given the complexity of the matter, a unique indicator has been created, considering this a way of comparing the costs of the various funds. The number of commissions on mutual funds is indeed high, and the most harmful are, in particular, those that are not seen (called “implicit” commissions).
Here are the different categories:
- Explicit or Implicit;
- Fixed or Variable;
- One Off or Periodic
Now let’s see in detail.
Explicit Commissions (present on prospectuses) or of:
- entry (subscription): for entry into the investment fund;
- transformation: if you want to change fund in which to invest;
- exit: for leaving the investment fund;
- management: this is the cost of the fund manager and also includes the advisory activity;
- administration: legal and administrative costs;
- deposit: to remunerate the Bank on which the invested sums are deposited.
Implied fees (not included in the prospectuses) or of:
- trading: for the purchase and sale of fund units during the investment period.
Variables and Annuals or of:
- performance: if the manager achieves a higher return than the market;
- management: always the same as before.
Fixed and One Off
They are paid for regardless of the amount of the investment and are amortized over the years. In other words, the less time you stay in the fund, the greater their impact on the return:
- entry (subscription);
- Fixed fees.
Performance and management fees
Distribution fee: how much the person who distributes the fund (i.e. the Bank) earns.
BUT HOW MUCH DO I PAY?
The full picture is provided by an article published in Forbes a few years ago, which made a fairly complete calculation of the main cost items and their weight on the quality of the investment.
The result is that, on average, the total impact of commissions is 3.17% on the final return!
The costs of funds: a very long “price list”.
Anyone who believes that the burden of investing in funds is limited to the subscription fee, therefore, must immediately think again: that is not true. In this regard, it is sufficient to read a prospectus of any Italian fund to identify, in the various articles of the regulation, the various costs borne by the fund.
In practice, these are fees of:
- storage and administration
- other costs and expenses