People like to make money. One way that people can make a lot of money is by investing. Since there is already risk involved in investing, and investors could lose a lot or all of their money, most people do not want to pay fees on the money that they actually do earn through their investments. But are there really investments that do not require fees?
A couple types of fees
There are a lot of different types of fees when it comes to investments. There is the surrender fee which each investor has to pay if they make an early withdrawal of their funds that are in an annuity or insurance contract. This fee also applies if they cancel an agreement. There is also a trailer fee. This fee is what a mutual fund manager pays to the salesperson that is going to sell the fund to an investor. There are several other types of fees as well.
The big problem about investment fees
When someone thinks about investment fees they may be used to them and not feel that they are really hurting their investment return. But actually a big problem with fees is that the person is losing the compounded value of the fees they are paying. For instance, if a person has a $100,000 investment portfolio that is earning ten percent a year and after around 50 years it increases to about $11.7 million, if the investor has a one percent fee then their money shrinks. And it does not just shrink a little bit. The return would shrink to $4.6 million. Because even though only $794,000 of that is the actual fee, the remaining money lost is money that the fee would have compounded over that time.
Mutual Funds
Depending on the mutual fund, there are different required fees. Some funds, such as exchanged-traded funds and index funds, charge fees that cover the cost of administering and managing the fund. There are other mutual funds that charge a load fee which is a one-time sales fee when a person buys the fund. There is even a fee that is charged when a person sells the fund, this is the one-time redemption fee.All mutual funds also charge an annual fee which is the percentage of the value of the person’s holdings. As the value of a person’s holdings increases so does their fee.
NTF Mutual Fund
A NTF is a No Transaction Fee Mutual Fund. This means that an investor is offered a mutual fund by a brokerage firm and they can purchase it without a type of commission charged on the transaction. Usually the brokerage firm can do this because they are being compensated by the mutual fund companies.
Can a person invest for free
The answer essentially is no. People cannot invest for free. But there are some ways that people can reduce their fees and the extra expenses when they are investing.
Trading
To cut down on investment fees investors should trade as little as they can. By decreasing trading, an investor can save up to a half of percentage point off of their expenses. Though that seems little, saving that half of percentage point, especially off a large return is important. An investor can cut their trading costs by investing in stocks that they will not need to unload in the future. This may take some research but will be worth it to the investor in the end.
Do it yourself
Investors can also save money on fees by doing it themselves. Load funds have to be purchased through a broker. Since relying on a broker to purchase loads funds will require an investor to compensate the broker through the fees that they will have to pay when making the investment, a person should choose no-load funds instead. If an investor chooses no-load funds they can purchase them themselves without the need of a broker and the broker’s fees. No-load funds can be purchased through the mutual-fund company directly. The investor just needs to call the mutual-fund company to purchase the no-load funds.