How to choose a fund – Part 5


One of the most confusing parts to funds can be the charges you pay and who you are paying that money to. There is also the issue that not all funds or advisers charge the same. Obviously though, whatever the cost these charges are going to affect the overall performance of the fund so they must be accounted for when calculating what your risk/reward ratio is.

As stated above, charges come in many guises. Let’s look at some of the more common ones:

Annual Management Charge (AMC): This is charged to cover ongoing costs, such as up to date analysis, and will be deducted from your investment either annually or quarterly.

Initial Charge: This is a one off cost charged by many funds as an ‘entry’ fee. The purpose is to cover set-up costs and can apply to both open and closed end funds although Exchange Traded Funds do not use them.

Administration Fee: This will also be charged on a regular basis and is self-explanatory.

Policy Fee: Is another word for administration charge and usually only refers to policies which have regular payments.

Investment Administration Charge: Will be charged on a percentage basis for regular premiums and as a one off for lump sums. This is when any buy/sell/fund switches are done.

Early Surrender: Can be applied if the policy is closed in toto before an agreed period of time which should have been explained to you before you started any investment.

Performance Charge: If a fund reaches a pre-agreed percentage gain then any further gains can be subject to a performance fee.

Adviser Fee: Your financial adviser will also charge a fee if you wish him or her to actively manage your portfolio.

So what now? You have done all your due diligence, you have selected the funds appropriate to your risk reward ratio and you want to start investing. How? Well, you can either invest directly into funds or use a life company as an umbrella. As with all things, there are pros and cons to both.

If you are only looking for short term gains with the funds you invest in then do not bother with life companies as the charging structure over the short term can be prohibitive and you may well have to pay early surrender charges. However, if you are looking beyond five years, and preferably longer, then some life companies’ products can help a lot as you will be buying at institutional rates and not retail ones. Also, your charges, after a certain period of time, make the overall cost of running the portfolio considerably cheaper than investing directly over the same period of time.

Caveat emptor though! Some life companies will charge high annual management costs in perpetuity. Over 20 to 30 years this can add up to be a lot of money. Others though will not and after anything between five and ten years will drop their charges to very little at all.

There are other benefits to a life company. For a start, the ease of administration as you only have to refer to one place to see how you are performing and not a load different places. Also, if you want to buy a new fund then you ‘borrow’ from the life company so you can buy when you want and not have to wait, like you would with dealing directly, until the original fund was sold. Once the original fund has been sold then the life company can be repaid. This also applies to investment trusts, ETFs, direct stocks and shares – all of which can be included in a life company Personal Portfolio Bond.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]