Lesson 2 of 4, 4 minutes
What fees cost over a lifetime
A yearly cost of 1% sounds small. It is charged on everything you own, every year.
A fund that charges 1% a year does not send you a bill. The cost is taken out of the fund a little at a time, and the return you see is already lower by that much. You never pay it. You only get less.
The charge is on everything you hold in the fund, and not on what the fund earned for you that year. In a year when the fund earns 11%, a cost of 1% takes about 9% of the return. In a year when the fund earns nothing, the cost is still 1%.
What it adds up to
Invest ₹50,000 a month for 30 years at 11% a year before costs. The only thing that changes below is what the fund charges.
- No cost₹12.64 Cr (₹2.20 Cr in today's money)
- Low, 0.25% a year₹11.97 Cr (₹2.08 Cr in today's money)
- Typical, 1% a year₹10.18 Cr (₹1.77 Cr in today's money)
- High, 2% a year₹8.22 Cr (₹1.43 Cr in today's money)
At 1% a year you end with ₹2.46 Cr less than you would with no cost. That is 19% of the final amount, from a charge that reads as 1. A yearly cost compounds against you the same way returns compound for you. Every unit that leaves as a cost also takes with it everything it would have earned in the years after.
Measure it against the return after inflation
What your money earns after inflation is what makes you richer. With a return of 11% and inflation of 6%, that is about 4.7% a year. A cost of 1% takes about 21% of it. Seen this way, the choice between a fund that costs 0.25% and one that costs 2% is one of the largest decisions in the plan.
What it does to your date
| No cost | FIRE at age 60 |
|---|---|
| Low, 0.25% a year | FIRE at age 61 |
| Typical, 1% a year | FIRE at age 65 |
| High, 2% a year | FIRE at age 69 |
Costs work on both sides of retirement. Before it, the corpus grows more slowly. After it, the corpus earns less while you draw on it, so you need a larger one to begin with.
How the calculator applies it
It takes the yearly cost out of the balance in twelve equal steps. A cost of 1% a year is 0.0837% of the balance each month, taken after the month's return is added. A monthly return of 0.8735% becomes 0.789%.
Do this week
- Find the yearly cost of every fund you hold. It is usually called the expense ratio, and it is printed in the fund's fact sheet.
- Add any yearly fee you pay an adviser or a platform. The cost that matters is the total that leaves your money each year.
- Put your total in the calculator under "What do your investments cost each year?" and note the FIRE date. Then try a lower cost and note the difference in years.