The effect of charges on investment returns

Whether you choose index or active managers you increase your chance of outperformance by focusing on those with lower fund costs, because you get to keep more of any return the funds achieve. Costs, like interest, also have a compounding effect over time.

They can have a dramatic impact on investment returns, one that’s not always obvious or transparent. The chart reveals the true importance of costs by showing the impact of Annual Management Charges (AMC) over time. We’ve assumed neutral growth so that the compounding effect of costs is readily apparent and not obscured by investment returns (either positive or negative).

Note how a low-cost portfolio, such as 0.2%, retains over 95% of the capital after 25 years, while a high-cost portfolio, say 2%, has eroded by almost 40%.

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