As is the case with any financial product or service, an investment in an investment fund entails costs that investors must bear either directly or indirectly.
These costs can vary greatly depending on the type of fund, its investment strategy, distribution channel, promoter … in short, on the of the fund initiator’s imagination when it comes to create all kinds of fees and commissions. The investor is therefore well advised to compare the conditions carefully before choosing one investment fund rather than another.
The most obvious costs are the subscription fees charged to investors on the purchase of an investment fund. The subscription fee is the difference between the value of a fund unit and the price the investor has to pay for the share and is usually used to remunerate the services supplied by the fund distributor. The maximum amount of the subscription fee is expressed as a percentage of the unit value and stated in the fund’s prospectus. As mentioned above, it may vary strongly depending on the structure of the distribution network, the size and the nature of the investment fund. While it can be very low for a money market fund, it is not rare that it reaches or exceeds 5% for equity funds.
It is not uncommon that funds charge a redemption fee when the investor withdraws his money and exits the fund. As each investment fund is obliged by law to entrust the custody of its assets to a custodian – who wants to be remunerated by the fund to provide this service – the fund will pass these costs on the investor by charging him a custodian fee. These fees are often settled directly from the fund assets.
Virtually all investment funds charge a management fee to cover the costs related to the daily management of the fund. The more sophisticated the research and analysis conducted by managers or the experts appointed by them to identify the most profitable investments and the higher the potential return, the higher the management fee tends to be.
A performance fee may be charged if a fund achieves a performance that exceeds the performance of a pre-established benchmark.
Some costs can’t be known in advance
In addition to the various fees and commissions specified and known in advance, investors also bear the fund’s costs for legal advice, the audit of its annual accounts by an auditor, mandatory publications and registrations … These costs are usually directly covered by the fund assets.
An important cost factor in an investment fund are the transaction costs incurred by the fund when it invests (such as stock exchange and brokerage fees on the purchase and sale of securities, for example). Since these costs will be paid from the fund assets, they are ultimately also borne by the investor.
An investment fund does not necessarily apply all these fees and commissions. Frequently, they adapt their fees and commissions to the types of investors (private and institutional) and / or the habits and customs prevailing on the markets they are targeting.
The “total expense ratio” (TER), which measures the total costs charged by an investment fund and is expressed as a percentage of the total fund assets, can help compare the costs associated with each fund. But since the TER does not include transaction costs for example, it is of limited relevance.
Passively managed funds (“ETFs”) that are traded on a Stock Exchange charge significantly lower fees. However, the investor has to pay the Stock Exchange and brokerage fees when buying or selling ETF units or shares on the Exchange.