When buying a fund, it is important to understand the respective fund charges and fees as these will limit the value of your investment:
- Initial Charge: The fund manager usually requires an initial charge of 5% to be paid, of which they keep before investing your money in their fund. This figure is usually around the 5% mark by default. However, fund supermarkets and some banks commonly discount this initial charge completely as nobody likes the idea of losing 5% straight away. If the initial charge is discounted complete, you can be sure that £5,000 investing in fund, is being fully invested in the fund.
- Annual Management Charge: The Annual Management Charge (AMC) is a yearly charge from the fund manager which ranges from 1 to 1.5% (of the value of the fund), although sometimes the AMC can be raised to a slightly higher percentage.
- Total Expense Ratio: The Total Expense Ratio (TER) is a key overall indicator of the associated fees of a fund. Mathematically, it is the annual management fee + any relevant expenses pertaining to the fund. These expenses could include things such as yearly audit fees.
- Bid/Offer Spread: Usually funds have two associated prices, that is the the offer price and the bid price. These are simply known as the buy and sell price respective.
The TER is a particularly important charge to be aware of. However, you should also be concerned with potential activity concerning the fund. For example, some providers feature a switching fee and an exit fee should you decide to sell your investment at later date.