IN A NUTSHELL: Although investment fee percentages might seem negligible, over the years these fees can significantly impact the money your investments earn.
When you invest your money for the long-term in a unit trust, exchange-traded fund (ETF) or retirement fund, you want your money to become more, to grow. This growth is expressed as a percentage per year. One year your money could grow by 12% and the next year by only 6%.
All investment products have a fund fact sheet where they show the average growth of the investment.
Look for “performance” or “return” on the fund’s fact sheet. This rate typically varies between 5% and 16% per year. However, South African shares have grown at an average rate of 7.3% from 2000 to 2023 according to Old Mutual’s Long-term Perspectives 2024 publication.
Below is an example of a retirement fund’s returns during various time frames compared with its benchmark. (A benchmark is a standard used to compare how well an investment or fund performs.)
Alexforbes Performer Fund
This brings us back to investment fees – which typically vary from 1% to 4% of your total investment – and why it is important to understand how these fees work.
Here’s an example of the same fund’s investment fees.
Alexforbes Performer Fund fees
To determine the actual growth, or real return, of an investment, you have to take inflation and fees into account. So, the real return is what’s left after inflation and the investment fees have been deducted. For example, if a fund earns 10% in a year but inflation is 3% and the fees 2%, the real return is closer to 5%. The fee percentage of 2% might seem small but over time, high fees can significantly reduce the overall investment value.
The graphic below illustrates the effect of investment fees of 1% compared to 3% over 40 years.
Source: 10x
The take-home message is that even a small percentage more, from 1% to 3%, can make a significant difference (over R380 000!) over 40 years.
Therefore, ask your financial advisor for the Total Investment Charges (TIC) of each option. The TIC covers all fee-related costs of an investment. And it’s the best way to compare apples with apples when it comes to investing your hard-earned savings.
Further reading
Sources
AlexForbes: Understanding investment fees
Mail & Guardian: How to compare investment fees
Moneyweb: Investment and performance fees 101
10x: Understanding the fees you pay on your investments
Manage your money like a * grownup by Sam Beckbessinger
SA Financial Markets Journal: Long term real investment returns
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