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What are the trading costs of investing in funds?

We make no charge for buying, selling or switching any of the investments bought via us. However, funds do incur trading costs which they may pass on to you.

The trading costs are incurred directly by the fund, so are the same irrespective of whether you buy the fund via us or somebody else (although we are more transparent about the total costs incurred by funds than some of our competitors).

Trading costs are not always passed on directly - often funds will just absorb them. Funds trade at a very large scale and can offset trades internally, which means that their trading costs are often negligible.

However, the size of the trading costs can vary considerably from day to day, depending on the overall situation of the fund. For example, if lots of new people put money into the fund, then the fund will need to invest that money in stocks and shares which will generate more trading costs.

If significant trading costs are incurred by a fund they may be passed on directly to investors. When this happens the costs are usually between 0% and 2% of the amount invested, although they can occasionally be higher.

What are trading costs paying for?

Trading costs are the costs to the fund of buying and selling the underlying stocks and shares. For example, the fund has to pay a broker to place trades in the stock market and it may have to pay stamp duty tax on certain types of investments.

There is also always a difference between the buying and selling price for stocks and shares, known as a "spread". For example, a spread for 2% means that if a fund pays £100 to buy a share, they would only get £98 for it if they sold it again straight away.

It's a bit like a currency exchange, which might sell you Dollars for £0.68 but buy them from you for £0.64. This is another type of trading cost for the fund.

For assets that are traded in large volume (such as FTSE 100 company shares) the spread is usually very small (eg 0.05%), but for assets that are traded infrequently (eg smaller companies) it can be larger (eg 2%).

Funds trade at a very large scale, so their trading costs are much lower than they would be if you were to buy the stocks and shares yourself. That is one of the advantages of investing in a fund. However, they can sometimes still be a significant cost.

How are trading costs allocated to investors in the fund?

Funds aim to ensure that trading costs are spread fairly between the different investors in a fund - existing investors, new investors putting money in, and departing investors taking money out.

In particular, they aim to protect existing investors from the costs of any trading which is caused by new investors and departing investors.

They have two different ways of doing this. Some funds retain the right to apply a "dilution levy" and others a "bid / offer spread":

  • A dilution levy is an explicit allocation of the fund's trading costs to the new investments. For example, if a new investment of £10,000 created £20 of trading costs for the fund, this £20 could be passed on explicitly to the new investors as a dilution levy.
  • A "bid/offer spread" means that new investments pay a higher price for units, which indirectly contributes to the fund's trading costs. For example, if a new investment of £10,000 created £20 of trading costs for the fund, the unit price might be 0.2% higher.

These work in different ways, but they both result in the value of units purchased being less than the amount invested. Which is why it is usually not sensible to switch investments too frequently.

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