IF YOU buy a slice of papaya for 60 cents, not much can go wrong. You could get a rotten papaya or it might be sliced too thin, but you can always check before buying. The worst that can happen is you lose 60 cents.

TEXT & GRAPHICS: LARRY HAVERKAMP & MAROO

'Buyer beware' works well with papaya.

When it comes to financial products, there are more places to hide the real risks, returns and costs. The stakes are also higher since people invest their life's savings in financial products, but not papaya.

Banks, life insurers and financial planners offer help. What they sell you, however, comes with charges that you pay but never see.

I am talking about unit trusts and investment-linked products (ILPs) which I will call 'funds' for short. A common practice is 'deductions from the yield'.

Let's say your fund has a good year and earns 13 per cent. You never see that return. The fund only shows you the net return after costs.

It might come to 7 per cent. The difference of 13 - 7 = 6 per cent is called 'expenses'.

About half the expenses - 3 per cent - get disclosed in an 'expense ratio'. The other half are hidden. Incredibly, you pay them and don't even know it.

The hidden expenses come in three main categories:

In the US, for example, the withholding tax rate on dividends and interest is 30 per cent. Unit trusts and ILPs subtract those tax payments from the total yield to give the net yield.

All you see is the net yield. There is no way to tell that you paid foreign taxes.

Here in Singapore, more than 95 per cent of funds are actively managed. They attempt to buy hot stocks at the perfect time. It sounds sensible but all evidence shows that it can't be done.

A better and cheaper strategy is passive management. It buys all the shares in an index like the Straits Times Index (STI).

Most of our actively managed funds buy and sell shares frequently, which racks up large brokerage commissions. Some funds even encourage brokers to over-charge the fund and then return part of the money.

The money, however, doesn't go back to the fund's investors. It goes to the fund management company, which uses it to buy research and technology that it probably would have purchased anyway.

An employee would likely go to jail for this. When a fund management company does it, however, it is business as usual. It even has a polite name: soft dollar rebates.

The practice - but not the amount - is usually disclosed in the prospectus. That is good, but it gets left off the brochures and fact sheets, which is what investors read.

More than 90 per cent of the funds here invest overseas. It means they must convert from Singapore dollars to the foreign currency and back again.

The conversion cost is deducted directly from the yield, so investors are unlikely to find out about it.

One fund manager told me: 'Don't worry. Exchange conversion costs are transparent to investors.'

In this case, the word 'transparent' means 'invisible'. It is the opposite of how we usually think of transparent.

Expense ratio versus management fee

YOU might think, 'Well, if half the expenses are hidden, it means the other half are not.'

Dream on.

The 'expense ratio' is not hidden.

The latest practice, however, is to disclose only part of it, called 'management fees'.

If the expense ratio is 3 per cent, the management fees might be 2 per cent.

It is shown in the brochures and fact sheets, and typically understates the real cost by one-third or more.

One fund manager told me it would be suicide for him to report the true expense ratio since his competitors report the lower management fee.

It is a perverse form of competition.

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