Charges versus investment returns - is it that simple?

Genevieve29

If charges for investment B are 1% higher than for investment A, would investment B simply need to deliver returns more than 1% higher than investment A to make more money if the amount invested was the same?

eskbanker

Taken literally, yes, but the returns delivered from funds will typically be shown after deduction of fund charges (OCF, etc) anyway.

masonic

The charge is based on the value of the fund at specific points in time over the course of the year, which will go up and down, whereas the returns over the course of the same year are based on the starting and final value only. Furthermore, percentages don't work like that. Consider a fund with zero charges that goes up 10% on the first day of trading and stays at that price for the rest of the year - £100 invested will be worth £110. If the same fund went up 11% instead, but had a 1% charge, the gross final value would be £111, but the fees would be 1% of £111 (i.e. £1.11), so the final value net of charges would be £109.89.

As eskbanker says, this is all academic, as returns are quoted net of fees.

Thrugelmir

Genevieve29 said:

If charges for investment B are 1% higher than for investment A, would investment B simply need to deliver returns more than 1% higher than investment A to make more money if the amount invested was the same?

Fees should be one element to be considered when constructing a portfolio. ETF's for example carry very low charges. However spreads between buying and selling prices can widen considerably from time to time.  

maxsteam

Genevieve29 said:

If charges for investment B are 1% higher than for investment A, would investment B simply need to deliver returns more than 1% higher than investment A to make more money if the amount invested was the same?

No. If investment B's returns were 1% higher than A's, you would be slightly worse off.
Suppose option A is to put £100 in a drawer and option B is to invest £100 into something where a 1% fee is deducted then the value rises by 1%. With option B you end up with 99 x 1.01 = £99.99.
In the real world, fees and returns are sometimes mixed up, doubled up or hidden. It's not unusual to invest in a fund through a broker and for that fund to invest in another fund. Each fund will charge fees, as will the broker. Each time the fund trades, fees will be charged. Usually funds have entry fees and annual management fees (5% and 1% is not unusual). If you invest in a whacky scheme organised by a friendly investment adviser, and the money disappears, it's occasionally easier to prove that you were badly advised than that you were defrauded. Whacky schemes, of course, come with higher-than-average fees.