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This 1 Factor Will Eat Away Your Wealth While You Are Sleeping

Mark down the date: 1 August 2018. It could be the day when the fund management industry changed forever.

On this day, financial services firm Fidelity revealed not one, but two mutual funds that will charge zero management fees. It seemed like a matter time before it happened. Prior to that, index fund companies had been engaged in a war to lower management fees. As it stands, fund industry stalwarts such as Blackrock and Vanguard were already offering popular index funds that enable investors like you and me to invest in stock indexes around the world — and, this next part is crucial — at very low expense ratios.

But should investors bother whether a fund charges 1% fee or a 2% fee? We think they should.

Nom, Nom, Nom

An investor bulletin by the US Securities and Exchange Commission (SEC) provided more insight.

For an initial sum US$100,000 invested with a 4% annual return, the final sum after 20 years would be around US$220,000, without any fees. However, if a 1% annual fee was imposed, the seemingly small fee would whisk away as much as US$40,000 from the investor, leaving the final figure at around US$180,000 after 20 years. That’s not small potatoes, to say the least. If that US$40,000 had been invested with a 4% annual return over 20 years, it would yield the investor around US$47,000 in profits.

In other words, these fees could be eating away our wealth as we sleep.

Examples of such fees include broker commissions, custodian fees, sales loads, early withdrawal fees, and annual operating expenses or management fees. Mutual funds and structured products often charge annual fees which cover management and marketing expenses. These are often reflected as the fund’s expense ratio.

As investors, the expense ratio is one key factor we should not ignore.

The fact that Fidelity, which is one of the investment industry’s largest players, is offering zero-fee mutual funds underlines the importance investors are placing on expense ratios. We think Singapore’s investors should pay attention too.

Bargain Shopping

Just as we enjoy shopping around for the best bargains, investing in funds should be no different.

With the rise of the internet, it has become easier for retail investors to start investing on their own rather than rely on third parties such as consumer banks or insurers. Even if you not know which stocks to pick, there is a diverse array of index funds or exchange traded funds (ETF) on the Singapore market to choose from.

For instance, State Street Global Investors and Nikko Asset Management offer index ETFs that track the returns of Singapore’s Straits Times Index. State Street’s SPDR STI ETF (SGX: ES3) sports a 0.3% expense ratio (for the fiscal year ended 30 June 2017) while the Nikko AM Singapore STI ETF  (SGX:G3B) reported an expense ratio of 0.33% for the same period. At less than S$350 per lot, retail investors can gain equity exposure to the 30 largest and most liquid companies on the Singapore Stock Exchange.

As Fidelity has shown, perhaps we will see even lower fees in the future in Singapore.

Meanwhile, there are 28 surprising and important things we think every Singaporean investor should know--and we've laid them all out in The Motley Fool Singapore's new e-book. Packed with information and insights, we believe this book will help you be a better, smarter investor. You can download the full e-book FREE of charge--simply click here now to claim your copy.

The Motley Fool Singapore contributor Ong Junyu contributed to this article.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chin Hui Leong does not own any of the companies mentioned. Motley Fool Singapore contributor Ong Junyu does not own any of the companies mentioned.