With unit trusts investing, definitely, costs do matter. Basically, numerous academic studies over the years have shown that expenses are one of the few reliable indicators of future fund performance.

However, does a fund's headline expense ratio reflect its true cost efficiency? The answer is 'NO'. A fund's expense ratio only takes into account the most obvious types of costs it incurs like management fees, trustee and custodian fees, general administration costs and goods and services tax.

There are often several other significant expenses not reflected in a fund's expense ratio, which weigh down its performance.

A fund's trading costs are among the largest of these hidden expenses. These include explicit brokerage fees that funds incur when they buy and sell securities as well as less implicit costs like the difference between the bid and asking prices in a transaction and the market impact of trading large volumes of securities.

Comparing a fund's portfolio turnover ratio and its returns over a period of time with other funds in the same class can give one a feel of whether its fund manager is chalking up unnecessary expenses.

Portfolio turnover ratios, which are disclosed in a fund's semi-annual reports, show the volume of trades done in a year as a percentage of a fund's total assets. A turnover of 200% means that the average stock holdings of a fund is about six months while a 50% turnover would indicate that stocks on average are invested for at least two years.

In order to estimate a fund's trading cost, doubles the fund's portfolio turnover ratio and multiplies that figure by 0.6%. So, the estimated trading cost of a fund with a 100% turnover ratio is estimated to have trading costs of 1.2% (100 x 2 x 0.6%) of its net asset value.

Another cost that is invisible to fund investors relates to 'soft commission' deals between fund companies and the stockbrokers they use. In soft commission deals, fund managers agree to use a particular broker for trade execution and to pay a specific level of brokerage fees in exchange for services or products that might help their fund management efforts. These typically include free research materials, Bloomberg terminals and software. However, critics say the cost of these 'freebies' ought to be borne by fund management companies instead of the funds they manage. Currently, soft commission arrangements between fund managers and their brokers are only disclosed very vaguely in funds' semi-annual reports.

Other hidden costs of funds are foreign exchange conversion costs and taxes. However, as fund investors, we don't really know what the costs of conversion are because this is not disclosed.

As for taxes, funds that invest in markets like the US will be subjected to capital gains and withholding taxes, which are indirectly deducted from the funds' assets. When a fund receives dividend income or interest, it might be taxed. When a fund takes profit on a share, there might also be capital gains taxes, so, most probably such taxes are not disclosed to investors.

It would be wiser if all these hidden costs are disclosed, as it will then enable an investor to have more information to evaluate a fund.