The cost structure of an investment fund is very important. In this article we look at how costs influence the return you can make using an investment fund. The costs play a more important role than most people think!
Costs: do not underestimate
A lot of people mainly focus on profit when selecting an investment fund, but never underestimate the costs! Costs have a very strong effect on the eventual results of the fund. With an investment of 100,000 dollars a difference of 0.65 percent in costs can result in 100,000 dollars less profit over a period of 30 years!
So keep an eye on the costs when selecting a proper investment fund! Every percent in costs means less profit for you. If you need to pay one percent in costs, your profit needs to be at least one percent higher at another fund to achieve the same result. Because of the effect of compounding, the effect of costs will only increase in the long term.
Two cost structures
With investment funds there are usually two cost structures: management fee and performance fee. An investment fund has costs. Besides taxes on their profit, the fund must also pay its staff, the rent for the building, the paper they write on, etc. The fact is that an investment fund never trades for free.
I always choose a fund based on the performance fee. That way you only pay for favourable results; when things aren’t going too well you don’t have to pay anything extra. With a management fee you even pay the fund when it isn’t doing too well – twice the loss!
The performance fee makes it more appealing for the fund manager to achieve better results because the fund manager makes more money when the fund does well. Always check for hidden costs when you’re looking for an investment fund. There are plenty of funds that charge you money to deposit or withdraw money.
Start trading yourself?
If you trade yourself it will be a lot cheaper, but you do need to understand what you’re doing. As a new trader it’s really interesting to start trading through a demo account, so you can see if you can make more money trading on your own.