Buying funds through the wrong channel can be a costly business. To illustrate, we compare two investors over 12 months buying and selling the same funds. John and Peter both have US$500,000 invested, initially in the Aliquot Gold Bullion Mutual Fund. John invested via his bank while Peter used the buying power of an international portfolio bond (IPB) on the advice of his independent financial adviser.

During the year both investors switched and diversified into Barings Eastern European fund, HSBC GIF Chinese Equity fund and LM-Mortgage Income Fund, at a fixed at call rate of 7.5%. How did both portfolios perform in reality?

Performance may be the same but returns on investment yield a different story. In our example the year-to-date returns for each of the securities listed are:

- Aliquot: 14.31%.

- Barings: 54.2%.

- HSBC China: 60.4%.

- LM-MIFs: 7.5%.

However, when actual returns are compared, John's growth was $64,000 less than Peter's in the first quarter. Why?

John failed to realise that funds bought direct, or via restricted intermediaries such as banks, are penalised as a consequence of indirect expense ratios involving:

- Fund entry charges of between 1% and 5.25%.

- Asset management fees up to 2.25% per year.

- Redemption or market level adjustment charges around 5% in the first year.

- Bid/offer spread differentials amounting to around 5% between the buy-in price and the sell-out price of units in the fund, known as the bid/offer spread.

- Daily performance rate variables as a consequence of market volatility.

- Forex losses owing to poor market timing when funds are purchased.

In the cases of John and Peter, gradual capital erosion started at the outset for three reasons. Not only did Peter save the entry penalty by purchasing through his IPB, but also his personally appointed asset management team bought NAV units at $0.50 cheaper through shrewd market timing. Additional savings were passed on to Peter from the elimination of 5% of the bid/offer spread differential charges.

Peter now has some $601,500 to reinvest. John has a greatly reduced amount of $537,495. So, like mirrors, performance rates sometimes distort according to who holds the mirror.

The consequence of "waterfall depreciations". This demonstrates the "waterfall effect" of the next investment acquisition being either increased or reduced because of the cause and effect in your choice of investment vehicle. This accumulates, for example, when buying into the Barings fund.

Peter again avoids the 5.25% entry penalty by buying more units within his IPB but John suffers a further loss of $28,218 to buy the same fund. There are similar redemption penalties. Should John rely on poor asset management and the market timing effect on NAV rates, capital sums erode even further. Allowing for the $15.00 differential at time of purchase, each portfolio value at the end of the second quarter would be: John $526,932 and Peter $819,030. Peter is enjoying real solid growth returns.

Early profit birds always catch investment worms. Anglers know that the choicest bait surfaces after a heavy downpour. Investments are similar, but only if one watches market storms and opportunities. How much expense is involved in collecting those returns?

Once again, disparities between portfolio strategies govern the total investment harvest. With a return this year of 60.40%, the Chinese Equity Fund is a star achiever. However, entry/exit charges and poor asset management timing will have a different impact for each investor.

John purchases fund units at the day's high of, say, a $64.50 NAV rate, while Peter invests shrewdly at the market average of $59.00. Then if both were to sell at $66.00, the portfolio balances would be approximately $539,000 and $916,000 respectively. Unfortunately, John would have to pay in excess of $8,000 to exit the fund.

Waterfall effects over previous investment dealings have allowed Peter to invest an additional $292,000, purchasing an additional 5,712 units at preferential market-timed NAV rates.

Charges can extract heavy penalties, so too can forex adjustments. In the final round of the portfolio bout, let's look at how diversification into an asset-backed secured fund with forex considerations might turn original gold bullion deposits into less valuable dust holdings.

Although fixed at annual rates of 7.50% with no monthly redemption penalties to consider, market timing still plays a major part in returns on capital invested.

Buying into secure Australian property funds and liquidating at different exchange rates has investment yield consequences.

For simplicity, we will use a level playing field of 1.00/A$2.45 buy and 1.00/A$2.40 sell, in relation to units purchased within each portfolio. Rates for conversion average 1.00/$1.96. Thus, John now has 275,078 to invest, while Peter has accumulated 467,421.

If held to full term at fixed rates and subsequently converted back at 1.00/A$2.40 and 1.00/$1.96, the final portfolio holdings would amount to approximately US$591,663 for John and US$1,005,372 for Peter.

Whether prospecting for gold strikes, or plain investing into fund investment mines, it clearly pays to select the independent adviser.