Different investments come with costs and fees. In this article, you will learn what investment costs are and the distinct types.
What are Investment Costs?
Investment costs are costs associated with acquiring, keeping and selling an asset. They include but are not limited to broker fees, trading fees, or expense ratios. Investment costs can impact the return on your investments.
Types of Investment Costs
1. Annual or Custodian Fee
Annual or custodian fees are paid to an individual or entity that manages your investments. This could be a bank or broker.
2. Frontend Load Fee
A frontend load fee is charged when you buy shares. It is a one-time fee deducted from the investment at initial date of purchase.
3. Backend Load Fee
Also referred to as a deferred sales charge or redemption fee, the backend load fee is charged when you sell off your shares. It is a small percentage of the actual value of the investment.
A backend load fee can be a flat fee or gradually decrease over time, usually between five to ten years. This means that the percentage is higher in the initial year and reduces in subsequent years.
4. Expense Ratio
An expense ratio is a fee that covers administrative, marketing, portfolio management, investment management costs, and more. This fee is usually percentage-based and represents the annual cost of the investor.
The expense ratio is usually charged annually on mutual funds or exchange-traded funds (ETFs).
Types of investment costs for mutual funds
1. Trailing Commission
Trailing commission is an ongoing fee charged for services rendered by a financial consultant, broker, advisor, or firm. Services such as reviewing a client’s investment holdings and providing advice. Trailing fees are usually paid out of the fund manager’s fees.
2. Trading Commission
Trading commission is charged when you buy or sell shares or some other investment securities such as ETFs, Options, or mutual funds. The charges vary depending on the investment firm or the brokerage you are dealing with.
3. Sales Charge
A sales charge is an additional fee paid by an investor to compensate the broker or salesman for effecting the sales transaction of an investment asset.
The sales charge can also be called load and can be charged upfront, at the time of scale, or at a later agreed date by the parties involved.
Types of investment costs for bonds
1. Explicit Costs
Explicit costs in bonds are costs that you should see or costs that are publicized to you by the brokerage firm. They could come in form of commission charges, custody fees, or mark-up fees.
- Commission: The fee paid to the broker that arranged the purchase of the bond investment.
- Custody fees: The fee a broker charges you to keep or hold your bonds investment
- Mark-Up fees: This is the difference between what you pay for your bond investment and the suggested selling price.
2. Implicit Costs
These are charges or fees that you may not see or notice until many months after you have sold out your bonds. Implicit costs are not usually noted in your investment statement until when you are required to pay them.
The most common form of implicit costs is taxes.
How to reduce or avoid investment costs
- Invest with brokers with very minimal costs of investment
- Invest in low-cost index funds
- Invest in low-load mutual funds
- Scrutinize your investments options for hidden fees
What are the 8 types of investments?
- Stocks (Equities)
- Bonds and Fixed income instruments
- Mutual Funds
- Exchange Traded Funds
- Cash and Cash Equivalents
- Real Estate
- Gold and other precious metals
Are investment costs fixed costs?
No, Investment costs are not fixed costs. They vary for different assets, and also from company to company.
Do your due diligence on investment costs when making investment decisions.