The Three Things that Matter

Risk, return and costs are the three things which matter
in any investment

The Three Things that Matter

Three things and only three things matter in mutual fund investing. These are risk, return and cost. The returns you will get from a mutual fund are not known. Of course, you can have some idea about the sort of returns to expect by looking at past performance. That’s, however, very different from knowing for sure what returns you will get. The disclaimer ‘past performance is not indicative of future returns’ is used to express this uncertainty. These two unknowns, risk and return are linked to each other. The theory is that to get greater returns you will have to take more risk. At the same time, this does not mean that taking greater risks will necessarily deliver more returns. Risk and returns are the known unknowns of investing. The only thing, which is certain and clearly known, is costs.

Costs are the known, knowns of the investing world. Costs reduce your returns. A mutual fund levies only two types of costs on its investors.

1. A cost for buying the fund.
The cost for buying into the fund goes by various names such as front-end charge, sales load or entry load. The person or entity selling the fund usually earns this cost.
2. A cost for running the fund.
The costs involved in running the fund are covered under the head, total expense ratio.
In Singapore you may also face two more costs. These are a
1. Wrap fee
The wrap fee is a fee charged by a financial planner for the services he or she provides.
2. Platform fee.
Platform fee is the fee charged by a website which allows you to purchase investments through it.

As costs are the only known knowns of the investing world it would make sense for investors to focus on these.