What your bank's mutual funds really cost you

Why costs matter more than they seem

An investment's future return is uncertain. Its cost isn't: you pay it every year, whether markets are up or down. And you pay it not only on your initial capital but on all the gains built up in previous years too.

Take €100,000 invested at a hypothetical gross return of 6% a year:

Same capital, same markets. Costs alone make the difference, and it grows every year. If you're aiming for financial independence, it can mean years of extra work.

The costs you pay (even if you don't see them)

• Ongoing charges: the management fee and the fund's other costs, taken daily from the unit price. They never show up as a charge on your account, which is why they go unnoticed. For actively managed funds sold by Italian banks they're often between 1.5% and 2.5% a year; for index funds and ETFs often below 0.5%.
• Entry and exit fees: a percentage of what you pay in or take out, which for some funds reaches a few percentage points.
• Performance fees: a share of the return if the fund beats a set target.
• Transaction costs: what the fund spends buying and selling securities.
• Service costs: custody, advice, discretionary management. With unit-linked and hybrid insurance policies, the policy's own costs come on top of the funds' costs.

Where to find them in black and white

1. The fund's KID

Every fund has a KID (Key Information Document), which your bank must give you and which you can also find on the fund manager's website by searching the ISIN code. The "What are the costs?" section shows one-off costs, annual ongoing costs and any performance fees, both as a percentage and in euros on an example investment.

2. The annual cost report

Banks must send you an annual report of costs and charges (rendiconto dei costi e degli oneri), often found in the documents section of your online banking. It shows in euros what you paid during the year, adding up product and service costs. It's the most honest number you have: compare it with how much you've invested.

"But the fund returns more": the right comparison

A more expensive fund can only be worth its price if, after costs, it consistently returns more than a cheap alternative with the same risk. Returns shown in the KID and in reports are already net of ongoing charges: compare them with an equivalent market index over at least 5–10 years. Numerous studies show that, over long horizons, most active funds fail to beat their benchmark.

Before you sell everything: careful

Finding out you're overpaying doesn't mean you should sell tomorrow. A hasty switch can be expensive:

• Taxes: selling realises gains, taxed at 26% in Italy. And with funds, losses can't be offset against gains.
• Exit penalties: some funds, and insurance policies in particular, charge surrender fees in the early years.
• Goals: the right choice depends on your horizon, your risk tolerance and what the money is for.

The first step is knowing what you pay. The second is deciding, calmly and with the numbers in front of you, whether and how to change. A portfolio review by someone who doesn't earn from products is exactly what that's for.