Investment costs

If you’re going to save or invest, then you need to make sure that the costs don’t eat in to your returns too much. But if you are investing, then there is going to be a cost involved – however, play your cards right and you could cut these substantially.

What are the costs?

With unit trusts - the most popular way of investing - there’s an initial charge which can be around 5% plus an annual charge of often around 1.5%. But there are also other administration costs which may not be apparent which is why the best indicator of how much you’re actually paying in charges is the total expense ratio (TER). This should be quoted by the fund.

  You can cut the costs of investing in a unit trust by buying through a fund supermarket or a financial adviser who will give you a discount on the charges. This is possible because much of the initial charge is there to remunerate the financial adviser and if they or the fund supermarket is going without this then they can rebate it to you. They might also rebate some of the annual charge.

  Strangely, investing in unit trusts is one of the only times when it doesn’t make sense to go direct to the manufacturer – in this case, the fund management company. If you do that, you will have to pay the full initial charge.

  With Oeics (open ended investment companies) there’s still an initial charge but because there is a single quoted price for the shares, it is quoted separately.

  With the annual charge, it’s important to find out if the charges are coming from the fund’s income or capital. If it is taken from capital – the amount you are putting in - then it means there’s more income - and the reverse is true if it’s taken from the income the fund earns.

  Remember that some unit trusts and Oeics have performance-related fees: these can eat into your returns. However, to get these the fund will have to surpass some set hurdles: make sure these are set high enough. And while of course it is important not to pay too much for an investment, it can be true that it is worth paying for expertise.

  The best fund managers will do better than a cheap index tracking fund – but sadly there are only a small number in this category. While past performance should not be the only element guiding your investment choice, it’s not a bad place to start and a long-term record of outperformance could suggest that it’s worth paying the price for the services of an expert manager.

  Investment trusts tend to be lower charging than unit trusts or Oeics because they don’t have an initial charge as they don’t pay commission to advisers. But there are still costs involved.

Firstly, you will have to pay to buy the investment trust shares – although this can be low particularly if you buy direct from the company. Otherwise, you’ll have to go via a stockbroker. In most cases you will also have to pay stamp duty which is 0.5%. There is also an annual management charge on the funds which is usually offset by the income a trust receives from its investments. TERs on investment trusts tend to be lower than on unit trust or Oeics, particularly for the large, general trusts where they can be as low as 0.5%.

  With other investments, remember that complexity costs and charges may not always be clear. Structured products – which use financial derivatives to produce a return linked to an index – build in the charges in your return. Life assurance investments such as with-profits bonds and endowments have opaque charging structures too.