Despite renewed pressure on fund managers to be more transparent on fees, the jargon can make it hard for investors to understand exactly what they are paying
Fund factsheets can contain a mix of different acronyms, but the most important is the OCF – the Ongoing Charges Figure. The OCF includes the annual management charges on the fund (also known as AMCs), as well as a variety of other operating costs and administration costs.
All regulated funds now must display their OCF, which is expressed as a percentage. This makes it a useful way to compare charges between different funds. If a fund has an OCF of 0.5%, this means at least 0.5% of the value of your fund is paid to the manager each year in charges. There will be additional costs to pay on top of this, explained below.
Remember, this charge is applied to the total value of your fund, including investment growth. It is not just a percentage of the contributions you have paid in.
KEEPING UP TO DATE
If you have been investing for several years you may remember the ‘Total Expense Ratio’ (TER), which was supplanted by the OCF in 2012. The two terms are broadly similar – both include the AMC plus some other fund expenses. The main difference is that the OCF includes some additional charges, such as the cost of producing reports and the fund manager’s research costs.
A ‘Total Expense Ratio’ implies that this includes all costs paid by the investors, which is not the case. Unfortunately, the OCF is also a slightly misleading name as it does not include all fund charges.
The OCF represents the ongoing costs to the fund, which includes the AMC and other charges for services such as keeping a register of investors, calculating the price of the fund’s units or shares and keeping the fund’s assets safe.
The OCF is a slightly misleading name as it does not include all fund charges.
However, the OCF leaves out the transaction costs of buying and selling assets within the fund, including any commission paid to stockbrokers, dealing charges and stamp duty – which is levied on the purchase of nearly all UK shares.
These costs vary significantly from fund to fund, partly depending on how frequently the manager buys and sells shares. Since January 2018 fund managers have been required to include information on their transactional costs alongside the OCF. Transactional costs are projected based on previous actual dealing charges and can be a useful way for investors to understand what these additional expenses might be.
The new figures won’t include any initial charges, nor the cost of buying and holding a fund through a platform.
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The value of your investments, and the income from them, can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.