Quick answer: 10,000 plus 1,000 a year for 10 years at 7% grows to 32,487.96 with no costs, but to 30,058.49 with a 0.75% expense ratio and a 2% front-end load: the costs take 2,429.47.
How it's calculated
A front-end load is taken from each amount you invest, so only (1 − load) is invested. The expense ratio is charged every year on the fund's assets, which reduces the yearly growth to 1 + return − expense ratio, as in the fee examples of fund prospectuses. The yearly addition is made at the start of each year after the first, so 10 years held means the initial sum plus 9 additions.
A back-end load (deferred sales charge or redemption fee) is taken from the value when you sell; here it is applied to the final value. Some funds charge it on the lower of cost and value, or reduce it the longer you hold.
Return after costs is the yearly rate that turns the money you paid in into what you take out (the internal rate of return). Small fee differences compound: 1% a year over 30 years takes roughly a quarter of the final value.
Worked examples
- 10,000 + 1,000 a year, 7%, 10 years, 0.75% ER, 2% front load: 30,058.49 (no costs: 32,487.96)
- Same with no load: 30,671.93
Frequently asked questions
What is an expense ratio?
The fund's yearly running costs as a percentage of assets – management fee and other expenses – taken out of the fund before returns reach you.
Are loads common in the Gulf?
Many GCC mutual funds charge a subscription fee of up to about 2% and some a redemption fee. Check the fund's terms and conditions and fact sheet.
Is a higher-fee fund ever worth it?
Only if its return after costs is higher. Past outperformance often does not last, while costs are certain.
Why do small fees matter so much?
They are taken every year from your whole balance, including past growth. Over decades, even a small percentage adds up to a large sum.
What is the difference between front-end and back-end loads?
A front-end load comes off each amount you invest. A back-end load is taken when you sell.
How does an index fund compare?
Index funds usually have much lower expense ratios. Enter their costs and compare them, using the same return before costs.