When thinking about investing, most people focus on the risks and returns, and fail to consider the costs involved. However, left unmanaged these costs could accrue and undermine the returns you may be earning from your investment. You should always know the various expenses before making any investment decision. Here is a rundown of the most common costs associated with investing:
- Management fees
Investment funds deduct management fees, usually yearly, amounting to a percentage of the value of the investment. Some prorate the charge while others deduct it up front. It is usually non-refundable. These fees enable the fund manager to cover all their overhead costs.
- Performance fees
Fund managers usually have a target return they want to achieve. When they exceed that return, some charge a performance fee as a reward. It is usually a percentage of the extra return achieved. Usually, paying a performance fee is an indication that your investment is outperforming and giving you a great yield. However, your fund manager should make you aware of any such provision before you join the fund to allow you to make an informed decision.
- Taxes
The taxes charged on an investment vary, depending on the type and field of investment. Real estate investors, for example, have to pay an annual stamp duty for land they own and any land transactions they conduct. The interest earned from bonds and treasury bills is also subject to a withholding tax up to a certain amount. However, products that provide capital gains, for example MansaX, are not taxed. If possible, invest in a product with zero or low tax implications.
- Trade commissions
Whenever you buy or sell shares in a stock exchange, you pay a trade commission to the broker who carries out your instructions. This is usually a percentage of the total value of the transaction and varies from broker to broker. Investment bankers are also paid a trade commission by their clients for corporate financial transactions such as mergers and acquisitions and IPOs.
- Transaction fees
Many funds will not charge you to transfer, withdraw or deposit money into your account. However, a few will have a transaction fee for these actions. A good example is money market funds, which have a small charge for transactions, particularly those done over mobile money. When investing, seek to understand the circumstances under which you will be charged as well as the amount.
In conclusion, an investment could be earning you a high return, but this will not be worth much if most of it is swallowed by hidden costs. Understand all the various charges associated with any investment before participating in it. In addition, actively work to avoid them where possible. Read more about reducing your investment costs here.