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The Cost of Investing – are ‘hidden’ Charges Eating Your Returns?

We live in interesting times.

The investment bank Lehman Brothers has filed for bankruptcy protection, Merrill Lynch is being taken over by Bank of America and it’s predicted thousands of bank employees will be picking up their P45s by the end of the month. If you have money invested in ISAs and personal pensions these may be worrying times. It’s likely that you’ll have a reasonable percentage invested in the UK, US and major economies’ stockmarkets.

With the major indeces, such as the FTSE in the UK, falling, you may be wondering if you should be taking any action.

Should you leave the funds as they are?

Should you ‘switch’ funds to reduce risk?

And are the funds you are invested in actually performing when compared to funds of a similar nature?

One key aspect to investing is understanding the impact that investment costs have on your overall returns.

As you’ll know, when you earn interest on your money in the bank, the return is ‘net’. That is, there are no hidden charges that you need to be wary of. If the bank offers you 5% pa gross, you know you’ll earn 4% after tax, or 3% if you’re a 40% taxpayer.

The situation is not as clear when you invest in a mutual fund.

Let’s look at equity ISAs (investing in Unit Trusts/OEICs) as an example.

The costs you need to consider are:

– Initial charge when you invest the money (could be up to 6%) – Annual Management Charge, typically 1.5% pa

– Total Expense Ratio (TER), includes other costs including trustee fees, custodian charges, auditors, legal costs, printing and marketing, this typically adds 0.1 – 1.6% pa

Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives. Click here for Financial Advice for UK Doctors and Dentists and to get your free retirement guide, How To Avoid The 7 Most Common Retirement Planning Mistakes. Rutherford Wilkinson plc is authorised and regulated by the Financial Services Authority.

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