What a fund's fees really cost you

A percentage that looks small

An investment fund with a 2% yearly management fee doesn't sound expensive. But the fee is charged every year on the whole balance, not just on the gains, and it comes out of the return before the return reaches you.

If the market returns 7% in a year, a fund with a 2% fee leaves you about 4.9%. One with a 0.2% fee leaves you about 6.8%.

What the gap looks like in lei

Take the same investment in two funds tracking the same market: 10,000 lei to start, plus 500 lei a month, at a 7% gross annual return.

After 20 years:

• with a 0.2% fee you have about 284,900 lei;
• with a 2% fee you have about 225,600 lei.

The gap is about 59,200 lei, a fifth of the cheaper fund's value.

After 30 years the gap reaches about 194,600 lei, nearly a third.

Why it grows so much

Money paid in fees isn't lost just once. It stops earning returns in every year that follows. It is compound interest working in reverse.

What to look at

• The management fee, as a percentage per year. It is the main cost.
• The fund's total costs, which also include custody, audit and other expenses. You'll find them in the fund's key information document.
• Entry and exit fees, paid when you buy and when you sell.

A higher fee would be justified if the fund consistently delivered a better return after costs. Before assuming that, compare its long-term results with those of a cheap fund tracking the same index.

Put your funds' fees into the fee impact calculator and see the gap over your own period.