Check total return
You will find the fund’s total return in the financial highlights, usually in the front of the prospectus or the annual financial statements published by the fund. Total return measures increases and decreases in the value of your investment over time, after subtracting costs (you will usually find it written as “Net Return”). When expressed as a percentage, net return for an indicated period is calculated by dividing the change in a fund’s Net Asset Value, assuming reinvestment of all income and capital gains distributions, by the initial price.
See how the net return has varied over the years. The Financial Highlights show yearly total return for the most recent five or ten year period. Looking at year-to-year changes in total return is a good way to see how stable the fund’s returns have been.
Scrutinise the fund’s fees and expenses
Funds charge investors fees and expenses – which can lower your returns. For example, if on an investment of €5000, you have to pay a front-end fee of 2% (€100), the actual amount invested would be €4900. This means that if you wish to realise an adequate return, the fund would need to achieve a return which would at least get back the fee that you paid initially. Find the section in the fund’s prospectus where the costs are laid out. You can use the information in this section to compare the costs of different funds.
Usually, fees fall under two main categories:
sales load and transaction fees (paid when you buy, sell, or exchange your units), and
ongoing expenses (paid while you remain invested in the fund).
No-load funds do not charge sales loads.
Front-end load: A front-end load is a sales charge you pay when you buy units. This type of load reduces the amount of your investment in the fund.
Back-end load: A back-end load is a sales charge you pay when you sell your units. It usually starts out at a specified amount for the first year and gets smaller each year after that until it reaches zero (say, in year four of your investment).
The section about fees tells you also the kind of ongoing expenses you will pay while you remain invested in the fund. The relevant section shows expenses as a percentage of the fund’s assets, generally for the most recent fiscal year. Here, the section will tell you the management fee (which pays for managing the fund’s portfolio), along with any other fees and expenses.
Some funds also charge a performance fee. This annual fee – which is usually paid to the adviser of the fund – is applied by applying a percentage to the difference in the performance of the fund during the year compared to the performance with the previous year. The calculation of the fee may not be very straight forward and you will need the assistance of your intermediary if you want to know more about how this fee is calculated. In essence, this fee gives an incentive to the adviser of the fund to select the best securities on the market in which to invest. A better performance will mean that the adviser gets a larger share of the profits which the fund has generated.
A difference in expenses that may look small to you can make a big difference in the value of your investment over time.
Many funds allow you to switch your units for units of another sub-fund within the same collective investment scheme. The fee section will tell you if there are any switching fees.