Simon from Financial Expert has authored the following guide on how to invest in funds with a thrifty mindset! Save money when investing by reading on!
I have created 4 rules for thrifty investing.
One, Two, Three, Four. It’s time for you to save more!
If you follow the passive investing approach, you’ll appreciate that a penny saved is just as important as a penny earned. There’s no point creating small passive income streams if you throw much of it away on expensive charges.
Follow these 4 thrifty rules to the letter to enjoy low investment costs and higher returns from your portfolio, whether it’s funds or dividend-paying shares.
Rule 1: Avoid ‘initial fees’ or ‘load fees’ like the plague
Initial fees are leveed by some funds at the point of purchase. Initial fees were once very commonplace, and inescapable. But since low-cost index funds arrived from the US, competition has pushed these funds to the sidelines.
But they’re far from extinct. Morningstar, a fund analysis website, lists hundreds of funds which permit initial fees of up to 7.5%.
Even well known mutual fund companies, such as Franklin Templeton allow ‘sales fees’ of up to 5.75%.
Paying an upfront fee is like incurring a loss on your investment on day one before it has even had a chance to work for you.
In 2019, all mainstream investment strategies are available from at least one fund manager which does not charge an initial fee.
Therefore if you encounter any fund that asks for upfront fees at the door, keep on walking!
Rule 2: Compare brokers and investment platforms by combining their account AND trading fees
Investors looking to choose an investment account often focus in on two types of charges:
- Trading fees e.g. £8.99 to buy shares
- Account fees e.g. 0.5% of assets per year, billed quarterly.
Investors who expect to place frequent trades tend to hone in on the provider with the lowest trading fee. Meanwhile, infrequent or small investors will seek out the provider with the lowest account fee to reduce their annual overhead.
The frugal option might actually be neither of those market-beating providers.
This is because while investors will place more emphasis on one fee over the other – they’ll still have to pay both. Therefore if you perform their comparison on the basis of the total fees they expect to pay per year – you may be surprised at the answer.
Rule 3: Always seek out fee-free investing.
Just because you’ve found your perfect stock broker companion – the cheapest way to place your next trade might be elsewhere.
For example, many fund managers such as Vanguard offer accounts which provide direct access to their suite of funds with zero trading fees.
Therefore, opening an account directly with Vanguard might be more cost-effective than using your stockbroker to buy units in their fund.
Rule 4: Price check the ongoing management charge
The Ongoing Management Charge (OMC) is a measure of many of the expenses that a fund will deduct from its assets each year. It’s primarily made up of the management charge. Oddly, the OMC does not include the fund’s trading costs or stamp duty, so it isn’t a ‘total’ expenses figure.
Before you invest in a fund, use Google to research several other funds with the same strategy. Open their fund factsheet (which is always available on the fund manager’s website) and gauge what range the industry charges. Is your dreamy fund actually the most competitive?
Remember, a penny paid is a penny lost. If the fund that has gotten you excited charges 0.5% more than its peers, it has a high bar to clear before it’ll start offering you better value than a more efficiently run alternative. Over ten year, a 0.5% fee premium will reduce your portfolio by 5% – that could be thousands of pounds!
About the Writer: Simon creates the investing course content for Financial-Expert.co.uk, which includes topics such as how to buy shares on the stock market.