In some cases this is justified and can be attributed to the skill of the fund managers. But before you invest in managed funds, be aware of the upfront fees (entry fees), the ongoing fees (Management Expense Ratio) and any fees applying if you withdraw your investment (exit fees).

Entry fees can range from nothing for an indexed fund such as Vanguard Australia to 3-4 per cent for an active fund such as BT Funds Management. BT charge a 3 per cent entry fee (or 4 per cent for a superannuation product) if you invest directly through them. If you use a financial planner to invest in a BT fund, it is up to the discretion of the financial planner as to whether they charge the full 3 per cent. For example, if you invest $10,000 in a fund and an entry fee of 3 per cent is charged then your initial investment drops to only $9700.

The ongoing fees, the MERs, including the management fee and any other annual expenses associated with running the fund can range from a low of about 0.7 per cent for an indexed fund to a high of 6-7 per cent for an active fund. The average MER is about 1.5-2 per cent for an active fund. MERs vary according to the manager and also depending on the amount of funds invested (usually discounts apply to larger amounts invested). Over a period of time the MERs can eat into the return by the fund.

The question on investors' minds is how do fund managers justify charging them 1.5-2 per cent annually to manage their money? During a bull market when funds are returning 15 per cent a year, a 2 per cent MER is not noticeable compared to during a down time when returns are low.

An argument put forward by fund managers is that their fees reflect quality. A higher MER may be justified by a better return. Exit fees can be a trap if investors withdraw their money within a certain time frame.

Zurich Investment Management says in order to protect other investors within the fund a penalty is often applied during the first few years of the investment. This usually affects to mortgage trusts, unlisted property trusts and fixed term bonds. "Nil entry fee" products, often superannuation and allocated pension products, may also have exit fees.

GST is also an issue that needs to be considered when examining fees. Entry fees may be affected by a GST but many managers are passing on the GST to investors, increasing MERs by up to 0.3 per cent. Some managers such as Macquarie Bank have absorbed the GST and have not increased fees. Other managers have increased their fees but by less as they say an increase in input credits negates some of the GST. Many managers have yet to decide how much their MERs will increase as a result of the GST and companies such as BT say the increase will be negligible, maybe as low as 0.05 per cent.

Investors should also be aware that if they buy a fund through a financial planner, although they may not charge a fee for their services, the planner generally receives a trailing commission from the fund manager. This commission is not obvious to investors but effectively reduces the returns from their investment (as a part of the MER).

The alternative to buying funds through a financial planner or directly through the fund manager is to use a discount broker such as Commonwealth Securities. Commonwealth Securities provides a low-cost but advice-free way to invest in managed funds through its Web site at www.comsec.com.au. It will rebate up to 100 per cent of the entry fee if an online prospectus is used. This method may suit more informed investors as no advice is provided.

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