Investment Fee Calculator
Table of contents
What are investment fees?How to calculate investment feesHow fees impact your investments?FAQsWith this investment fees calculator, we aim to help you to calculate the investment management fees of your investments. Most investors neglect the effect of the investment fees when they invest, and this article will tell you why you should not. You can check out our investment calculator too.
We have written this article to help you understand the following:
- What the investment fees are; and
- How to calculate the investment fees for your investments.
We will also demonstrate some examples to help you understand the concept.
What are investment fees?
The investment fees, also known as investment management fees, are the fees charged to investors when they invest their money into a fund. The fund charges fees to their investors to maintain their operation, such as paying for their employees. The fees also include the transaction costs of the fund. So, if the fund buys and sells its investments very often, it will typically have higher fees.
When deciding which investments to invest in, most investors only look at the gross returns of the fund. They think investment fees are insignificant and will not affect their investment returns. This is actually a huge mistake, and the following sections will tell you why.
Be sure to check out our real rate of return calculator and the rate of return calculator to understand more about this topic.
How to calculate investment fees
Let's take the following investment as an example of how to calculate the impact of investment fees.
- Initial investment amount: $10,000
- Sales load: 2%
- Annual return: 10%
- Annual operating fees: 2%
- Investment duration: 10 years
- Turnover cost: 3%
- Redemption fees: 2%
The calculation of investment fees requires four steps:
-
Compute the invested amount
The
invested amountis the actual money that is invested in the fund. It can be calculated using the formula below:invested amount = initial investment amount × (1 - sales load)For our example, the
invested amountis$10,000 × (1 - 2%) = $9,800 -
Calculate the effective return
The
effective returnis defined as the return of the fund after deducting the operating fees:effective return = annual return - annual operating feesThe
effective returnof the investment is10% - 2% = 8%. -
Calculate the fund value before redemption
The
fund value before redemptionis the fund value after being invested over the investment duration. Theturnover cost, which is the transaction costs incurred when the fund buys or sells its investments, will also be deducted. We can calculatefund value before redemptionusing the following formula:fund value before redemption = invested amount × (1 + effective return)^investment duration - invested amount × turnover costThe investment's
fund value before redemptionis$9,800 × (1 + 8%)^10 - $9,800 × 3% = $20,863.46. -
Calculate the final fund value
The
final fund valueis the return on your investment after redemption:final fund value = fund value before redemption × (1 - redemption fees)The
final fund valueof the investment is$20,863.46 × (1 - 2%) = $20,446.20.
Our calculator also calculates the total fees and the fund value without fees for your reference.
How fees impact your investments?
After calculating the final fund value, it would be insightful to calculate the fund value without fees to understand how the fees impact investments. The fund value without fees can be calculated using the formula below:
fund value without fees = initial investment amount × (1 + annual return)^(investment duration)
Hence, the fund value before fees is $25,937.42.
Now, it is evident that investment management fees significantly impact your investments. By investing $10,000, you would have lost more than $5,000 in returns. This is the reason why it is essential to calculate the investment fees. It is the only way to understand how the fees impact your investments.
What is sales load?
Sales load is the fees you will need to pay when you buy shares from a mutual fund. This type of sales is called front-end sales load.
What is redemption fee?
The redemption fee is the fee you will need to pay when you sell the shares that you own in a mutual fund. The redemption fee is paid directly to the fund but not to the broker.
What is a mutual fund?
A mutual fund is a financial vehicle set up by pooling together money from different investors to invest in the market. The fund is usually managed by a portfolio manager, who can be a person, a team of people, or a company.
What is an ETF?
ETFs, which stand for exchange-traded funds, are financial instruments that are built to track the performance of an index, asset, sector, etc. ETFs can be interpreted as mutual funds that issue shares that are traded on exchanges.
How can I calculate the final fund value?
You can calculate the final fund value in four steps:
- Calculate the invested amount.
- Calculate the effective return.
- Compute the fund value before redemption.
- Apply the final fund value formula:
final fund value = fund value before redemption × (1 - redemption fees).
What is the effective return if the annual return is 10% with a 2% operating fees?
The effective return will be 8%. You can calculate this by subtracting the operating fees from the annual return.
Are investment fees tax deductible?
Unfortunately, almost no investment fees are tax-deductible. This is because these fees are considered investment expenses and are generally not deductible on a taxpayer's income tax return.