Four fees and charges you should watch for before buying funds

For more on funds read: Don't get ripped off when buying funds.

Initial charge

From zero to 5.5%. Darius McDermott, managing director of Chelsea Financial Services, says: "No one should be paying an upfront charge any more. This only tends to happen if you buy direct from the fund manager. You can have the charge rebated by going through a fund supermarket or discount broker."

Annual management charge (AMC)

Average 1.5%. It includes costs such as research, salaries, administration and trail commission to IFAs, and tends to be lower on a fixed-interest fund and higher on a speculative investment.

For more on AMCs, read: Performance at a price.

Neptune Russia, for example, charges 1.75%, which the manager justifies because of the higher cost of buying stocks in that region. A few brokers, such as Cavendish Online, rebate some or all of the AMC.

Total expense ratio (TER)

Average 1.6% for a UK equity fund. This may or may not be published in your documentation but can be up to double the AMC, so ask if you don't see it.

The TER includes stamp duty, auditors' fees, account dealing costs and the AMC. But watch out: 'total' can be a misnomer, as the cost of trading shares is not included and can add a further 1% to 1.5%.

Funds with high TERs include Psigma's European Income fund at 2.99% and Virgin's Climate Change fund at 3.49%. At the other end of the scale are the likes of Clerical Medical UK Growth with a TER of 1.05% and Schroder Gilt and Fixed Interest at 0.56%.

Performance fees

These are creeping into conventional funds, inspired by the incentives offered to hedge fund managers who are typically rewarded under the '2 and 20' rule: a 2% annual management charge plus 20% of annual returns. Managers try to achieve this by investing in and shorting shares (betting on share price falls).

For more on performance fees, read: Should you pay fund managers 'performance' fees?

Lipper figures show there are now 81 open-ended funds in the UK that apply performance fees, compared with just 34 funds at the end of 2007. These include the absolute return funds, which promise investors returns above zero whatever the state of the markets. They typically charge 1.5% annual fees and 20% of returns in excess of a minimum benchmark.

More about