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Before you invest in a unit trust, understand the costs involved…

by , 05 March 2014

When it comes to unit trust investing, fees and charges are taken out of your investment before your money starts working for you. And they tend to be hidden away and brushed aside by all those eager-beaver sales people. But that doesn't mean they don't matter. In fact, they can make or break your portfolio. Here's what you need to know about the costs involved BEFORE you pick the best unit trust to invest in…

Yes! The costs really DO matter when it comes to unit trust investing

We’ve all heard unit trust salesmen say: “What does it matter if charges are 1% or 2%, when you’re rolling in so much gravy unit trust returns, and could even put your unit trust returns into negative territory.

That’s why John C Bogle, chairman emeritus of the Vanguard Group in the US, says when it comes to unit trust investing: “There’s simply no credible evidence that paying higher costs results in receiving higher returns… To realise maximum value, the unit trust investor must know the cost of everything.”

What are the costs involved in unit trust investing?

There are two sets of costs you must be aware of, explains The South African Investor’s Leon Kok: The INITIAL FEE and the ANNUAL MANAGEMENT FEE or TER.

The initial fee – usually around 5% - includes compensation to the sales person or the financial advisor for selling you the unit trust. Essentially it pay the financial advisor to do the research, complete the paperwork, visit you, evaluate your financial situation and propose an investment in line with your risk profile and situation.

Initial fees for equity unit trusts are usually less than 5.7% but remember, these fees are negotiable.

The annual management fee (also called total expense ratios or TERs), on the other hand, covers all the annual expenses in a fund except for trading costs. The ratios include the annual fees and performance fees of the fund manager in charge of your unit trust. 

There you have it: Remember to compare upfront and annual management fees as these are the biggest determinants of your unit trust investing returns. Also remember that they change from time to time, so get the latest fee information from either your financial advisor or the unit trust company’s website.

Before you invest in a unit trust, understand the costs involved…
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