New investment calculator could save you thousands

Most fund management companies are very good at hiding the true cost of investing in their funds. A new calculator can help you peel away the confusion and find the cheapest options. You could end up saving thousands!

If you’ve ever invested in investment funds, and tried to pick a fund yourself, you’ll know that it can be tough.

Somehow you’ve got to trudge through all the marketing literature and figure out which funds will perform best in the future – not easy – and just as important, which funds have the lowest charges.

Comparing charges can be very confusing as you may see different figures being used with different jargon. The most widely used figures are the Annual Management Charge (AMC) and the Total Expense Ratio (TER). Of the two, I prefer the TER because it includes some admin costs that don’t show up in the AMC.

However, even the TER doesn’t tell the whole story. For example, the TER doesn’t include the costs that the fund has to pay every time it buys or sells shares. Many popular investment funds have TERs around the 1.5% mark, but in reality the true cost of investing in many funds is more like 2% a year.

It's very confusing and I suspect that the fund management industry like it that way. If investors are confused, it's easier for the fund management companies to levy rip-off charges.

Calculator

However, things are changing. The True & Fair campaign has launched a new calculator this week which makes it easier for ordinary investors to see a fund's true cost. Although some of these extra costs are estimates, the launch of the calculator is fantastic news!

Here’s how it works.

Let’s say you’re evaluating three different funds as possible investments. One is a cheap index tracker fund, the second is an investment trust (which also tend to have low costs), and the third is a more expensive ‘actively managed’ OEIC. Here are the funds:

HSBC FTSE All Share Index fund (an index tracker fund)

JP Emerging Markets Investment Trust

Invesco Perpetual Income (OEIC)

With the True & Fair calculator, it’s easy to see how much each fund charges, and you can also compare the funds’ past performance. What’s more, if you think you can predict how the different funds will perform in the future, you can see which fund will make you the most money.

Here is a table showing how the different funds compare:

Source: True & Fair investment calculator

All the above figures come from the True&Fair calculator. Crucially the calculator gives you a cost figure for each fund in pounds and pence. So it’s easy to spot that the Invesco Perpetual fund is the most expensive, costing £1,242.25 in total charges over five years. The HSBC fund is by far the cheapest – that’s what you’d expect of an index tracker fund. As a result it delivers the highest projected gain in the above table.

That said, some people would argue that the Invesco Perpetual Income fund is the best one to invest in. That’s because the fund is managed by Neil Woodford, perhaps the best stock picker in the UK. He has an excellent track record and has delivered strong performance over many years.

Indeed the table shows that Woodford’s Invesco fund has grown by 44% over the last five years compared to just 29% from the HSBC index tracker.

Investment return before costs

Let’s look at the ‘Investment return before costs’ row in the above table. In that line, I’ve assumed that all three funds will grow by the same amount over the next five years – 5% a year. However you could argue that, thanks to Neil Woodford, the Invesco fund will probably outperform the other two.

And if that outperformance is large enough, it could outweigh the extra costs you have to pay to invest in the Invesco fund. Using the True & Fair calculator, you can see how that might happen. All you need to do is plug in different numbers in the ‘investment return’ row.

Let’s assume that Neil Woodford’s Invesco fund grows by 6.6% a year for the next five years, the JP Morgan fund grows by 5.5% a year and the HSBC index tracker sticks at 5% a year. Here’s the table showing how the funds would perform:

Source: True & Fair investment calculator

Now you can see that the Invesco fund delivers a slightly higher projected gain (£2,997) than the HSBC index tracker (£2,985).

Of course, when I say that the Invesco fund will grow by 6.6% a year, I’m just guessing. There’s no guarantee that the Invesco fund will outperform over the next five years.

It’s that lack of certainty which makes me prefer index tracker funds and investment trusts. I prefer the certainty of lower costs over the possible outperformance from an ‘actively managed’ unit trust or OEIC such as Invesco Perpetual Income. But others may disagree, and that’s fair enough.

The point is this calculator gives everyone more accurate information about costs, and that should help us all make more informed investment decisions. It could save you thousands of pounds!

More on investing:

Earn 7.75% a year from the Jockey Club

Five top investment trusts

The cheapest index trackers

83% of managed funds are poor investments