Investment Management Association

Costs and charges of investing in funds  

One-off charges

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 of or all their initial commission to you. It is increasingly common for funds to have no initial charges although you may have to pay your adviser separately. 

Exit charges may apply but typically only if you sell after a short period of time.  They are rare in funds available to private investors.

Ongoing charges figure (OCF)

This 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, fund administrator and distributor.  Other operating costs include the costs for other services paid for by the fund, such as the fees paid to the trustee (or depositary), custodian, auditor and regulator. 

Performance fees are very rare in retail funds. Charged in addition to the Annual Management Charge (AMC), they reward the investment manager for superior returns or outperforming expectations.
 
Trading costs

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.  They are not part of the Ongoing Charges Figure and are disclosed separately in funds’ annual report and accounts. 

Total trading costs cannot be compared in a meaningful way because the markets for different types of asset operate in different ways.  For equities there are stockbroker's commissions and stamp duty, which can easily be quanitified. For bonds, there are no quantifiable costs because they are embedded within the transaction price.

Not all trades will affect all investors because trading costs incurred on behalf of incoming and outgoing investors are usually recovered from those investors through the daily price of the fund units.

What are you paying for?

Investment management

This includes researching the companies and markets in which the fund invests, and deciding which assets the fund should buy and sell. Costs are generally lower for tracker funds, as many of these decisions are automated.

Fund administration

This covers the running of the fund, such as calculating the daily price and keeping you informed of the fund’s progress, as well as the cost of setting up and maintaining a record of your investment in the fund.

Safeguarding your investment

This covers the cost of the trustee or depositary, which safeguards your interests by overseeing the manager’s activities, annual fees to the external auditor, who verifies that proper records have been maintained, and fees to the regulator, who authorises the fund.

Distribution

Advisers and fund platforms charge for their services.  These costs are likely to be paid by the fund manager out of the charges investors pay: they cannot be charged to the fund directly. However, new rules are being introduced that will change the way advisers and platforms receive and disclose their charges. Those new rules will take effect from the beginning of 2013.

Comparing fund costs

Fund charges have to be displayed in a standard way to enable you to compare the cost of investing in different funds. New rules were introduced from 1 July 2011 to make this easier for you. Funds governed by European regulation, known as the UCITS Directive, must, at the latest by 30 June 2012, provide you with a Key Investor Information Document (KIID), which includes a table of charges.

Other retail funds (ie. NURS), may provide you with either a KIID, a Simplified Prospectus or a Key Features Document. The Simplified Prospectus will show you the annual cost of operation of the fund as a Total Expense Ratio (TER) and the one-off charges. NURS funds that opt to provide a Key Features Document must show the TER together with what is known as a Reduction in Yield figure. 

You can compare the one-off charges and ongoing charges of different funds using the IMA's Fund Search facility. The lowest charging fund will not necessarily produce the best overall return for the investor. Some funds have higher charges but may also produce higher returns. It is important to consider performance as well as charges.