Investment charges explained


Initial charges are taken from your money before it is invested. The majority is paid in commission to the adviser from whom you bought the fund. Your adviser may refund some, or all, of their initial commission in a so-called 'rebate'. It is increasingly common for funds to have no initial charges. Also, there are sometimes exit charges, but these are rare.


This is the new term for the total expense ratio (TER) and it gives the most accurate measure of what it costs to invest in a fund. The OCF is made up of the annual management charge (AMC) and other operating costs.

The AMC is levied by the manager and is used to pay the investment manager, financial adviser, fund accountant, administrator and distributor. Other operating costs include those for extra services paid for by the fund, such as the fees paid to the trustee (or depositary), auditor and regulator.


These are costs incurred by the fund on your behalf for buying and selling the assets the fund invests in. They include commission paid to stockbrokers and stamp duty on UK equities.

Stamp duty is the biggest of these costs. It is not part of the OCF and is disclosed separately in funds’ annual reports and accounts.

Total trading costs cannot be compared in a meaningful way because the markets for different types of asset operate in different ways.


These reward the investment manager for superior returns or outperforming expectations. There are about 90 open-ended funds in the UK charging performance fees, up from 34 at the end of 2007, according to research by Lipper.

However, Ed Moisson, head of UK research at Lipper, believes they should generally be avoided. "Unless you’re willing to do your homework in order to understand how they kick in and how high they can be, I’d be careful about investing in funds with performance fees," he explains.

"You don’t get money paid back if they underperform, while the management fee will generally be set at the same level as those that don’t have performance fees."