The profitability of an investment fund depends to a large extent on the manager’s experience in selecting the assets that make up the portfolio. But there is another factor that also influences the final result: the commissions.
Therefore, it is important that you know what types of fees you can apply and in what range it would be reasonable for them to move. The lower they are, the more your actions will be worth.
This factor can be particularly relevant in funds that offer very modest returns, such as monetary or short-term fixed income.
Fees should always be included in the fund’s prospectus, where you can consult them whenever you wish. This brochure is available both in the operator itself and in the entity where you purchased it, as well as on the CNMV website.
Implicit fees
The main fees of a fund are those related to its operations. They are called implicit fees, as they are deducted daily from the net asset value. They would be as follows:
Management fee: this is the one charged by the manager as remuneration for its services. It should be in line with the difficulty involved in managing that product. Therefore, the fee of an index fund, which merely tracks the composition of an index, should be lower than that of an actively managed fund, where the manager must be aware of market developments, analyse the potential of each security and select those that can beat the index.
The same goes for fixed income. The fee of a monetary fund, which invests only in repo and very short-term debt, should be reduced, while the management of a global bond fund involves much more effort (it also brings more added value) and, therefore, should be higher.
Keep in mind that there are funds that are ostensibly actively managed, but in reality do not deviate too much from what the index does. In such cases, it is reasonable that the management fee is not high.
Funds usually calculate the management fee based on assets under management. But they can also calculate it based on the returns obtained (in which case it would be called a success commission) or combine both calculation methods. In all three scenarios there are legal maximums.
The successful commission is usually tied to hedge funds and has its pros and cons, which you will find throughout this article.
Deposit and custody fee: this is what the fund must pay to the custodian entity, which is responsible for the custody and custody of the securities in which it invests. It is usually very small (legally it cannot exceed 0.2% of the assets).
One way to know if the fee charged by a fund is disproportionate is to analyze what other products in the same category they charge. As an example button, we leave you the average fees charged by Spanish funds, according to the newspaper Expansión:
In addition to these fees, keep in mind that there are other expenses that also have an impact on the final profitability. A relevant fact is the ratio of total expenses or TER, which is expressed as a percentage of the fund’s equity. The ratio of total expenses includes management fees and would deposit more external services and other operating expenses.
Other commissions
On the other hand, there are fees that are not implicit (they are not automatically subtracted from the net asset value of the fund), but are explicit, i.e. they are borne directly by the participant:
Conversion fee: This is the one that applies in case of change between share classes.
Subscription/redemption fee: This is the one charged by the fund for buying or selling shares. It is applied to the amount subscribed/refunded by the participant and can be in favor of the manager or the fund itself (in this case it is called discount in favor of the fund).
Usually both are at 0%, but some funds try to penalize the entry or exit of participants for various reasons (related to the investment strategy of the fund itself) and can increase these fees by up to 5%. For example, a fund that invests in bonds with the aim of holding them to maturity and raising interest (buy & hold strategy) will penalize the exits in a certain period of time (that of the maturity of the bonds), as they would force it to sell the securities at the wrong time. The same applies to other categories, such as guaranteed funds or value philosophy funds.
On the other hand, there are funds that include in the brochure a subscription fee … but in the vast majority of cases, they do not charge it. Funds collect commission in the brochure in case in the future they need to collect it. Something that could happen, for example, if the fund’s assets reach a certain volume and the manager needs to limit inputs (too large a volume can be very complex to manage). To get out of doubt, it is advisable to contact the operator to find out if the subscription fee is applicable at the current time.
Finally, remember that an investment fund may charge different fees depending on the different classes of shares it issues. Classes with cheaper commissions are usually available to those participants who are willing to invest more money, although it may also depend on other criteria, such as marketing policies and denomination currency.
