One can invest in high yield bonds. They are issued by companies who do not enjoy solid financial strength. Hence they promise to pay high returns to attract investors. Most investors find this option highly attractive and a diversified option.
Ongoing Annual Costs These are not just the Annual Management Charge (AMC), typically 1.5%, but since there are also other administrative costs such as trustee fees, legal and auditors costs etc, the figure to illustrate these is known as a Total Expense Ratio (TER). This can be, say, another 0.2%, and so you would think that the overall annual cost is therefore 1.7%. However, there is a missing cost which can double or even treble (or more) this amount, and it is very unlikely you would ever know about it, as the information tends to be buried in the paperwork you receive. These are costs that the fund incurs for trading – buying and selling stocks – known as Portfolio Transaction Costs (PTC), OR Portfolio Turnover Rate (PTR) and they are not included in the TER. The more active a fund manager is buying and selling stocks, the higher will be the costs incurred. They include: 1. Cost of Commissions – Stockbroker’s charges for executing and then clearing a trade 2. Spread Costs – The bid / offer spread is the difference between the prices at which shares can be sold and bought 3. Market Impact Costs – Costs which are incurred when the price changes as a result of the effort to buy or sell that stock 4. Cost of Tax – In the UK there is stamp duty to be paid with trading 5. Opportunity Costs – This is the cost of a delayed or missed trade One of the amazing things we find is that not only do investors not know about these extra costs that have an impact on the returns you will receive, but some financial advisers do not know about them either!
If you have an adviser, make sure you ask them what the Portfolio Turnover Rate is on your funds. So, how can you find out about these extra costs? Well, they are in the fund’s prospectus, and will show for the previous year what percentage of fund assets were traded. The FSA estimates that a 100% fund turnover in an equity fund in a year would cost the fund around 1.8 per cent. However, on a Fixed interest fund, costs tend to be much lower. Latest calculations from Financial Express Data has shown that the average UK Equity fund to February 2009 showed a figure of 95% fund turnover, meaning that these trading costs would add circa 1.7% to the annual costs of the funds. It should be noted that in some markets, such as Emerging or Far East funds for example, the PTR rate can add much higher costs than this, even as high as 9%. So why are these costs so important to know about? Very simply they bring ‘performance drag’ to the way your money grows. Let’s add these costs up: AMC – 1.5% TER – 0.2% (say) PTR – 1.7% Total – 3.4% pa So, your fund will have to perform at 3.4% pa to even stand still! That is one of the main reasons why there has been a lot more interest in index and passive funds, which have much lower PTRs, and usually lower costs generally.
In order to select the right high yield investment program, following are the factors that can better help you in this regard. The first point in this regard is research. If you are looking for the online investment options, make extensive research about whether the company you want to deal with is a real company or scam.
They want you to buy their funds because they ‘outperform the market’. However, as academic research constantly shows, very few funds do this year in year out, and although you can LOOK BACK and see a few funds that have done this out of thousands, try to do this LOOKING AHEAD! As Ron Ross, Ph.D., writer of ‘The Unbeatable Market’ said – “Active [investment] management is little more than a gigantic con game”. We feel that an adviser who is able to give you access to funds with lower overall costs, and is able to deliver a better investment experience on a sustainable basis should be rewarded for this. Invariably, we can also tell a new client the growth rate they need on their investments to achieve their goals that they have identified with us. Nine times out of ten we can reduce the risks they are currently taking, as the financial map we create gives us this capacity. We believe achieving your goals whilst taking the MINIMUM risk is a very sensible approach. As an example of how ‘performance drag’ can affect the returns you experience, a fund with costs that are, say, 1.5% per annum lower over 20 years, and using a 7% gross projected growth rate, you would find that the resulting fund would be around 30% higher.
Before investing in a closed end fund keep in mind that not all closed end funds are structured to pay income, and some can distribute principal as part of their monthly or quarterly distributions. Do the research carefully if your heart is set upon buying them, do so when they are selling at a discount.
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