what exactly Yield reduction means

ericsun

I am looking at a fund

it charges as follows:

Initial charge :5.00%
Initial saving :5.00%
Annual charge : 1.50%
Annual saving 0.25%
Total expense : 1.71%

Yield reduction at 7% : 4.28%
Yield reduction at 6% : 3.67%


I thought Yield reduction equals total expense. however,

7% - 4.28% = 2.62% , not equals to 1.71%
6% - 3.67 = 2.33% , not equals to 1.71%

how did the tatal expense related to yield redutction?

thanks

EdInvestor

ericsun wrote: »

I am looking at a fund

it charges as follows:

Initial charge :5.00%
Initial saving :5.00%
Annual charge : 1.50%
Annual saving 0.25%
Total expense : 1.71%

This indicates that there are additional expenses on top of the AMC of 0.46%.

Yield reduction at 7% : 4.28%
Yield reduction at 6% : 3.67%


I thought Yield reduction equals total expense.

No, the Reduction in Yield shows the effect the expenses will have on the performance of the investment. In this case, if the fund grows at 7%, you will receive only 4.28%, the rest will go to the fund managers.

There's a table in this article which shows the very nasty effect on your wealth that this has over time:

http://www.fool.co.uk/news/retirement-pensions/2007/10/15/the-uk-cheapest-pension.aspx

The expenses on the fund you are looking at are very high.

dunstonh

reduction in yield is what you mean.

It tells you that due to charges over a 10 year period, a 7% return would be reduced to 2.62%. It takes into account bid/offer spread and initial charges.

It is worth noting that many fund supermarkets do not have the ability to show the RIY with the initial charge discounted and the RIY assumes full initial charge even if it is discounted or being rebated back. The RIY figures used in your last examples suggest that is the case here as RIY is typically around 0.1% more than the annual charge when there is no initial charge.

ericsun

dunstonh wrote: »

reduction in yield is what you mean.

It tells you that due to charges over a 10 year period, a 7% return would be reduced to 2.62%. It takes into account bid/offer spread and initial charges.

1.
thanks a lot.
I am looking at this fund at <a href="http://www.h-l.co.uk/fund_research/fund_key_features/sedol/3190414.hl">here</a&gt;
you mentioned 10 years period, where did you get the "10 year" ?

Debt_Free_Chick

Try this link instead

dunstonh

you mentioned 10 years period, where did you get the "10 year" ?

RIYs have to be quoted until maturity date. With open ended investments there is no maturity date and 10 years is the typical period used for these. It can be altered to suit personal terms but with generic illustrations, 10 years is the most common period used.