How investment fees work, and why small percentages compound
Sutra & Signal Research · Published · Last reviewed · 6 min read
The short answer
Most managed portfolios charge a management fee, a percentage of assets each year, and some add a performance fee, a share of gains above a threshold. Because fees are taken every year, a 1% difference can reduce a long-term outcome by a significant amount.
The main fee types
- Management fee: a fixed percentage of assets, charged whether returns are positive or not.
- Performance fee: a share of gains, usually only above a hurdle rate.
- High-water mark: performance fees are paid only on new highs, not on recovering earlier losses.
- Transaction costs and taxes: brokerage, exchange charges, STT and GST add up, especially for active strategies.
The compounding effect
Illustratively, ₹10 lakh growing at 10% a year for 20 years becomes about ₹67 lakh. At 9% — the same strategy with an extra 1% fee — it becomes about ₹56 lakh. The fee difference costs roughly ₹11 lakh. These are hypothetical figures to illustrate arithmetic, not a forecast.
Try different fee levels in our scenario simulator to see the effect for yourself.
Questions to ask
- Is the fee charged on committed or invested capital?
- Is there a hurdle, and is it a hard or soft hurdle?
- Is there a high-water mark?
- Are returns you are shown gross or net of fees?