How to rev up your KiwiSaver savings – Part 4

Think again if you haven’t shopped around for your choice of KiwiSaver fund. The most expensive fund is over ten times more expensive than the cheapest.

Once you have figured out broadly the risk you are willing to take on and have a sense of your investment timeframe the final step is trying to figure out what you are comfortable paying for.

While every KiwiSaver fund is different from the other in some shape or form, the fact is that there are broadly common characteristics between a number of them. This allows us to group the similar funds into categories.

Some funds invest into only one type of asset (for e.g., funds that invest only in company stocks or funds that invest only in company bonds or funds that invest only in property). These may be called ‘sector’ funds. Other funds invest into a mix of different assets and are called ‘diversified’ funds (meaning, diversified across sectors). Based on the mix of different sectors, diversified funds are also typically further categorised as Conservative, Balanced, Growth etc.

You would expect then that the fees you pay for funds in a category would be within a certain range of one another. Typically the cheapest funds would be Cash funds (those that invest only in cash like securities like bank term deposits). The most expensive funds are often those that invest into growth type of assets such as global shares. Most diversified funds end up costing somewhere between these two extremes.

You also have to decide whether you believe a team of investment professionals can add value or not. Some funds, called ‘Active’ funds, are managed by investment professionals who make decisions about how to invest your money. Based on their research capabilities they are allowed to decide what to buy and when and how.

Unlike these, ‘Passive’ funds are designed to mimic the direction of a market index (like the NZX50 which represents the largest 50 companies on the NZ sharemarket). These funds lose value when the index falls, and gain value when the index is going up. There is no human intervention to decide what to buy or when. Your fortunes in a passive fund are dictated by how the market as a whole is performing. Typically, active funds charge more, given there are more resources required to manage those types of funds. Meaning, expect to pay more if you are investing in Active funds.

 

The things to look out for

The fees you pay is one of the largest ‘known’ determinants of your future investment returns and so will have a very significant impact on you. This is simply because future returns are not predictable but fees are certain and are charged regardless of the fund going up or down in value. Over the years these can accumulate to significant amounts. So, choose wisely.

• There are different types of fees including performance fee, exit fees, entry fees etc. Some are excessive and should be avoided. For e.g., ensure your fund manager pays themselves a performance fees only for outperforming a target that is realistic and representative of where your money is invested. Or, avoid such funds that have additional fees.

• Ensure you understand whether your fund invests into other funds that charge a fee. In order to gain access to global assets, some KiwiSaver funds invest into funds managed by other fund managers.  Having a large number of underlying funds may mean excessive layers of fees. Avoid.

• How big your fund is, can matter. As an investor in a fund with few other investors, you may end up paying a disproportionate amount in costs of running the fund. So, keep an eye on the size of your fund and how its size trends over time.

• On a final note, be wary of choosing a fund simply because its ‘cheap’ – you might end up getting exactly that. It’s true that fees are the only ‘known’ determinant of your future returns but you are better off focusing on value for money and ensuring that you are getting what you pay for.

I want to shop for a suitable KiwiSaver fund – take me there!