Investment fund charges explained

There are two main types of fund charges you will need to consider: one-off and ongoing fees. In addition there will be a number of other costs to take into account. Although you will need to clarify charges with fund providers, these should give you an overview of what to expect.

 

ONE-OFF CHARGES

Most investment funds and platforms no longer impose initial charges. However, with some providers an entry charge of up to 5%  entry charge of up to 5% may be taken from your money before your investment is placed or units are purchased. Sometimes funds will levy exit charges, but these are rare.

 

ONGOING CHARGES FIGURE (OCF)

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

These charges cover the cost of running the fund. They include administrative costs such as maintaining records, producing reports and calculating the daily unit price, as well as the research that goes into deciding what assets to buy and sell.

TRADING COSTS

In addition to the OCF there will be the trading costs associated with buying and selling assets within the fund. These are a necessary evil for investment funds and will be paid from the fund. These charges will be higher for funds that trade regularly and less for those adopting a longer-term, buy and hold approach. The hope is that the extra returns made from successful trades will outweigh the costs involved.

The trading costs incurred by the fund 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. However, the industry regulator, the Financial Conduct Authority, is reviewing investment fund charges and transparency. It is hoped that this will result in an overall charge figure for funds with nothing left out. This would make it much easier to compare the charges of different funds.

Read Gina Miller hails fund charges report as "milestone" for investors.

 

PERFORMANCE FEES

These reward the investment manager for superior returns or outperforming expectations. Only around 100 of approximately 2,500 UK funds charge performance fees. Adrian Lowcock, investment director of Architas, is not a fan.

“Generally we’re not keen on performance fees but we do buy funds that charge them when we want access to particular strategies, such as absolute return,” he says. “Sometimes the only way to get access to certain managers is through paying a performance fee.”

Read about how many funds that charge performance fees fail to deliver good investment returns

 

PLATFORM CHARGES

In addition to the charge you pay for investing in the fund, you also have to pay a fee to the platform or stock broker that you hold your investments with. This might be an annual percentage charge of between 0.30% and 0.45% of the investments held with the platform or it could be a flat annual fee of say £80 to £100.

For more on investment platform fees, read Our guide to the best investment platforms for beginners.