Guide To Knowing Your Investment Costs And Charges
The primary concern of a regular investor investing in unit trusts, exchange traded funds (ETFs) or even shares would most probably be the performance of their investments. However, share prices should not be your only concern – you should also be paying attention to the charges you have to pay, which can have a significant impact on your returns.
As with anything you buy, there are costs and charges associated with your investment products and services. Although these fees may seem small, but over time they can have a major impact on the value of your investment portfolio. These costs and charges tend to eat into your returns, leaving your investment portfolio with sub-par performance.
Here are some investment costs and charges that you should be aware of:
1. Expense ratio
The costs of owning a fund is called the expense ratio, which is expressed as a percentage of the fund’s assets. This ratio covers the operating expenses of the investment. This is a more realistic indication of the true annual cost. The expense ratio is not deducted from your investment account, but the investment return you receive is in real terms, i.e. the net returns after this fee is deducted.
Example: A unit trust fund with an expense ratio of 1.9%, means that for every RM1,000 invested, approximately RM19 per year will go towards the operating expenses. If the same investment yields a return of 6%, you will receive RM60 as returns. With a gross returns of RM60 minus the expense ratio of RM19, you are only left with RM41 as net returns.
2. Management fee
These fees are charged annually as a percentage of the total assets managed for all the advisory and consultation services provided. They include expenses for portfolio management, the manager’s fees, trustee fees, audit fees, searching for historical data, administrative charges like printing of annual reports, distribution cheques, record keeping, prospectus mailings, maintaining a customer service line and website and other services incurred in the administration of the fund. Investments that invest in riskier assets, like equities and property, will have higher cost than their lower risk counterparts, like corporate bonds.
Example: Let us assume an investment management firm charges 1.8% management fee. If you have invested RM100,000, it means that you would have to pay RM1,800 per year on management fees alone.
3. Transaction fee or commission charges
Many investment accounts charge a transaction fee each time you place an order to purchase or sell a unit trust fund or shares. If you are investing money in small amounts, these fees adds up quickly. This fee is also known as a commission charge.
Example: You want to invest RM50,000 into a unit trust investment, and for each transaction you are charged RM25. If you choose to invest this amount in smaller portions of RM5,000 each time, you will pay a total of RM250 (RM25 x 10 transactions) in transaction fee.
4. Initial fee or sales charge
Some investments charge an initial fee when you purchase an investment, as a set up cost for investing in the fund. This is also known as sales charge.
Example: If you were to invest RM10,000 into a unit trust fund with a Net Asset Value (NAV) of RM0.2955 per unit and an initial fee of 5.5%, you will need to pay RM552 as initial fee. As such, the total amount payable into the investment is RM10,552 (RM10,000 + RM552).
Units credited: RM10,000 / RM0.2955 = 33,841 units
Sales charge per unit: RM0.2955 x 5.5% = RM0.0163
Total sales charge: RM0.0163 x 33,841 units = RM552
In a unit trust fund, it is levied primarily to cover the marketing and distributing units and monitoring of investments by the unit trust consultant. For unit trust investments, if you invest through EPF you will pay a lower initial fee, at about 3% NAV per unit. DIY online investment platforms (like FundSupermart) offer much lower sales charges (maximum of 2%) compared to traditional agencies (about 5%).
5. Exit fee, redemption fee or repurchase charge
Some investments will charge you an exit fee when you redeem your investment. This fee usually decreases for each successive year you own the investment. This acts as a measure to encourage investors to invest for a longer term. This fee represents a deduction by the investment management company from the proceeds of disposal of an investor.
Example: Let us assume at the time of redemption, the value of your investment is RM5,000. If an exit fee of 2% is imposed when you redeem within six months and 1% within 12 months from the date of purchase, you will pay RM100 for redemption made within six months and only half the amount (RM50) if you redeem it a year later.
6. Switching charge
Some investments will charge you a switching fee when you transfer your investment from one fund to another. This fee is to discourage investors from switching from one investment to another frequently. By frequently switching, investors are not giving their investment enough time to yield returns, but cost is continuously incurred in the form of switching charges.
Example: A unit trust switching may cost you RM50 if you switch within three months of the purchase date. However, if you switch the same fund after three months of the purchase date, you will only be changed half the amount in exit fees, i.e. RM25.
7. Brokerage fee or trading fee
A brokerage or trading fee compensates a broker for executing a share transaction on your behalf. It is usually a percentage of the transaction value, typically up to 0.7% of the investment value. Investing without a broker can save you that money. This can easily done today using online investment platforms.
8. Clearing fees
Clearing fee is charged by Bursa Malaysia as the clearing house and typical fee is 0.03% of the investment value.
9. Stamp duty
For a share trading investment, the Government charges a stamp duty of RM1 for every RM1,000 worth of share value.
Example: Let us assume you purchased 1,000 units of shares from DIGI at RM5.80 per unit share. If your broker charges a 1.0% brokerage fee to run the trade, the cost of your investment would be:
Value of investment: RM5.80 x 1,000 units = RM5,800
Brokerage fee: RM5,800 x 0.7% = RM40.60
Clearing fee: RM5,800 x 0.03% = RM1.74
Stamp duty: (RM5,800 / RM 1,000) x 1 = RM5.80
Total money paid: RM5,800 + RM40.60 + RM1.74 + RM5.80 = RM5,848.14
A month later you want to sell the shares, and you would need to pay another brokerage fee. Let us assume the DIGI shares are now at RM6.30 per unit share. The proceeds you will receive from the sale of your investment is:
Value of investment: RM6.30 x 1,000 units = RM6,300
Brokerage fee: RM6,300 x 0.7% = RM44.11
Clearing fee: RM6,300 x 0.03% = RM1.89
Stamp duty: (RM6,300 / RM 1,000) x 1 = RM6.30
Total money received: RM6,300 – RM44.11 – RM1.89 – RM6.30 = RM6,247.70
Although most investors would calculate the profit from the DIGI investment as RM500 (RM6,300 – RM5,800), the savvy investor takes brokerage fees into account and knows that the real profit is actually RM399.56 (RM6,247.70 – RM5,848.14).
Other costs that you should keep in view when investing are inactivity fees and minimum equity requirement fees. Inactivity fee is charged when you do not execute enough trades on your account within a stipulated time frame. On the other hand, minimum equity requirement fees refer to the cost incurred if you do not maintain a minimum balance in your share trading account.
By being aware of the extra fees and charges you will incur each time you invest, you can reduce your total transaction costs and maximise the returns on your investments. Most of these fee details are usually available in the investment prospectus, brochure or website. Alternatively, you can crunch this numbers through your unit trust consultant and brokers. Be sure to read the fine prints and understand how much you will be paying and how they can erode your net returns, if unmanaged.
Knowing these costs and charges will help you to better manage them without letting them eat up too much of your investment returns. Having relevant knowledge of your investments will enable you to make wiser investment decisions for a brighter financial future.