Funds: Buy cheap, buy twice?

12 min Read Published: 31 Jul 2015

fund chargesFund charges are a huge point of contention in the world of investing. Let's imagine that there are two funds, Fund A and Fund B. Now let's say that they both invest in exactly the same stocks and shares. Yet Fund B is able to do it with an annual charge of 1% versus a charge of 1.5% from Fund A.

Now let's assume that both funds grow at a rate of 7% a year BEFORE charges and we invest £50,000 in each. The table below shows the compounding effect of higher fund charges over time.

Value in Year 5 Value in Year 10 Value in Year 20 Value in Year 30 Fund A (1.5% annual charge) £65,057 £84,649 £143,309 £242,621 Fund B (1% annual charge) £66,706 £88,993 £158,398 £281,929 Difference in £ £1,649 £4,344 £15,089 £39,308 Extra % growth at end 2.53% 5.13% 10.53% 16.20%

 

As you can see the longer the timeframe the greater the compounding effect of higher charges.

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