By MoneyBees
Compare an index fund and an actively managed fund on your own returns, TER and sales charge, see what the fees take, and the outperformance the active fund needs to break even.
A passive fund, such as an index ETF, tries to match an index and charges little to do it. An active fund pays a manager to pick investments and try to beat the index, and charges more for that. MoneySense puts active management fees at 1.0% to 2.0% a year, and passive fees usually below 1%.
A lot, because they come off every year and compound. On S$10,000 plus S$500 a month for 20 years at 7%, an index fund trailing by 0.2% ends about S$49,000 ahead of an active fund with a 1.5% TER and a 1.5% sales charge that only matches the index before fees.
The total expense ratio is the yearly cost of running a fund as a percentage of its assets, taken from the fund itself. MoneySense says unit trust TERs are usually 1.0% to 2.5%, while ETFs on the same index range from 0.03% to over 0.5%.
The gap between an index fund's return and its index's return over a period. It includes the TER and shows how efficiently the fund copies the index. It is the better number to enter for the index fund here.
Roughly its extra costs: with no sales charge, its TER less the index fund's tracking difference. A sales charge raises the bar further, more so over shorter periods. The calculator works out the exact figure for your inputs.
Some do in some years. This calculator does not assume they will or will not: you enter the outperformance you expect. MoneySense suggests checking an active fund's track record against a passive fund on the same market before you invest.
MoneySense puts the initial sales charge at 1.5% to 5% of what you invest, paid to the distributor. Some distributors charge a redemption fee of 1% to 5% when you sell instead.
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