Find out how the long-term impact of fund charges and fees on your investment returns can be mitigated, and discover ways to cut costs in the process.

Why should I be concerned about the fund’s expenses?

It is important to consider fund charges since, despite the fact that fund performance can fluctuate, you will always be required to pay the fund charges.

Your returns might be significantly impacted by the fees that your fund incurs over time.

Here is how £1,000 invested in a fund costing 0.1 percent and a fund costing 1 percent would perform in three distinct investment performance scenarios, ranging from unfavourable (a loss of 5 percent), to neutral (no growth), to favourable (a growth of 5 percent):

Costs can be a reflection of the management style, asset classes invested in, or even just the prestige of the fund manager. Funds with higher charges do not necessarily have greater performance than funds with lower charges.

This article will walk you through the process of fund charges, explain ways to save money, and address any costs or taxes that may be related with your situation.

What exactly is the ongoing charge figure, often known as the OCF?

The ongoing charge figure is a measurement that provides a measure that is more realistic of an indicator of the true annual cost (OCF).

This includes the Annual Management Charge, which is the primary source of revenue for most companies.

The Overseas Contribution Fund (OCF) takes into consideration a variety of additional expenditures, including trustee and auditor fees, which are deducted directly from the fund. In addition to the AMC, these additional fees can easily amount to roughly 0.1 percent of the total.

Fund managers are legally required to disclose the ongoing charge in the documentation associated with their funds, and they are only allowed to publish this information once per year. You can look for it in a document that’s been given the name “Key Investor Information Document” (KIID).

What other expenses related to the fund might I anticipate?

The amount that represents the ongoing charges does not take into account these costs:

Transaction costs and a reserve tax on stamp duty

When a share is bought or sold by the fund, the company is subject to transaction fees and maybe stamp duty.

Tracker funds that are passively managed typically have lower trading fees than actively managed funds since they move investments less frequently.

Fees based on performance

In addition to the standard annual costs, additional performance fees may be levied by certain unit trusts and OEICs, as well as by many investment trusts. These fees are normally calculated as an additional 20 percent of everything that achieves performance in excess of a predetermined threshold.

What are some ways I can lower my fund charges?

There are various sorts of funds, some of which are significantly more expensive than others.

As an illustration, the annual management charge, which accounts for the vast majority of the OCF, often falls somewhere in the range of:

In most actively managed funds, the expense ratio ranges from 0.75 percent to 1.25 percent.
0.1 percent to 0.85 percent is the typical range for ‘tracker’ funds that are managed passively.
0.8 percent to 1.8 percent across the board for the majority of investment trusts

Even while it’s crucial to keep costs under control, the overall composition of your investment portfolio should reflect your long-term investing goals. These goals may require you to invest in more pricey funds or trusts.

Would it be more beneficial for you to purchase shares?

Bypassing the fund manager totally and keeping control of your own shares, you may be able to realise cost savings.

Having said that, you should think about whether you have the time or the skills to pick individual shares on your own.

Because funds can hold thousands of shares, the selection of such shares and the monitoring of their performance requires huge teams of seasoned professionals.

Keep in mind, too, that investment platforms may charge you a price to hold shares as well as a fee if you purchase or sell a share. This can make frequent trading more expensive.

There are platforms that cater more to frequent traders than others.

What fees are associated with making use of an investment platform or working with a broker?

Purchasing a fund through an investment platform or a broker will result in additional costs being charged to you.

Investment platforms can either collect a fee that is calculated as a percentage of the platform’s annual assets or a flat annual rate. A percentage-based charge will often be more cost-effective for you if you have a portfolio that is on the lower end (up to, say, £50,000), but a flat fee will serve you better if you have a portfolio that is on the higher end.

Consider the following illustration, which contrasts the yearly fees demanded by two different real-world investment platforms. The first one requires a one-time payment of £200, while the second one requires a payment that is equal to 0.39 percent of the portfolio:

If you have a substantial portfolio, the difference in the costs charged by the most inexpensive platform and the most expensive platform can add up to thousands of pounds. Additionally, some platforms will charge you a few pounds when you buy or sell an investment, and others will impose what are known as “exit fees,” although the latter is becoming an increasingly uncommon practise.

What kind of costs are involved while working with a financial adviser?

There are many different fee structures that financial advisers utilise, but the most common ones are as follows:

The costs charged by the adviser themselves; these may take the form of a flat rate, an hourly rate, or, more typically, a percentage of your total investments.
A fee that is imposed by the platform that is holding your investments; this fee is likely to be charged as a percentage of the total value of your investments.
Again, fees levied by the funds and trusts you own; these will most likely be expressed as a percentage of the total amount.

At the very least on an annual basis, you ought to get a statement that details the expenditures in question. This should be represented as a percentage, as well as the corresponding value in pounds and pence.

These expenses could be compensated for by the sale of some of your investments or through the utilisation of cash that has been accumulated through dividends.

Will I be required to make tax payments on the gains on my investments?

It is possible that you will still be required to pay taxation even after you have settled all of these fund costs.

You are exempt from paying dividend tax on dividend income up to £2,000 per year; however, if your dividend income exceeds this threshold, you will be required to pay dividend tax at a rate of 7.5 percent for basic rate taxpayers, 32.5 percent for higher rate taxpayers (33.75 from April 2022), or 38.1 percent for additional rate taxpayers (39.35 percent from April 2022).

When you sell funds, you can also be responsible for paying taxes on your capital gains. You are only need to pay 10 percent of your capital gains income above £12,300 if you are a taxpayer at the basic rate. If you are a taxpayer at the higher or additional rate, you are required to pay 20 percent of your capital gains income (18 percent or 28 percent for residential property respectively).

Rather than depending on tax allowances, you can protect your fund earnings from both of these charges by placing all of your funds in an Isa that is designated for stocks and shares.