An investment fund can have a number of charges associated it with it which, once deducted, will have an effect on the fund’s performance and the value you will get back on the sale of the shares held. Fees include the charge you might have to pay to initially access the fund, the charge applied for the daily, ongoing running of the fund, and the fee you might have to pay to exit the fund. Funds have a range of share classes which carry different charges. You should read the funds own marketing material to make yourself fully aware of such charges before you commit to invest.
Typical charges associated with a fund:
- Annual management charge
- Ongoing charge figure
- Bid offer spread
- Initial charge
- Performance fee
- Redemption/exit fee
- Contingent deferred sales charge
The charges applicable to each share class available will be provided in the legal document that the fund produces, called a Prospectus. Some charges may also be found on the fund’s Factsheet or its Key Investor Information Document (“KIID”).
Some fees might be waived through the product you invest in, such as the charge to purchase shares in the fund, so you should also read any product literature in conjunction with the fund literature.
Annual management charge (“AMC”)
This is a fee charged to a fund by the investment manager who is running the fund. It is usually shown as an annual percentage fee, such as 1.50% and is based on the assets under management (i.e. fund size). The fee covers the costs involved in running the fund on a day to day basis. The charge is taken into account within the published fund price.
Ongoing charge figure ("OCF")
There are other operating costs which are charged to a fund in addition to the AMC, and all will have an impact on the performance of the fund. The ongoing charge figure (previously referred to as Total Expense Ratio or TER) is the figure that includes all these charges. It includes the AMC plus other operational costs such as audit fees, custody fees, professional fees and regulatory fees. If the fund has UCITS status it must publish an OCF (as long as the fund has been running for more than 12 months) in its KIID document which must be updated and republished every year. Many funds are starting to move away from showing the AMC and only publishing the more comprehensive ongoing charge figure as this is a truer reflection for investors of the total cost.
Bid offer spread
Some funds are dual priced (such as a unit trust) that publish two prices, a bid price and an offer price. The bid offer spread is simply the difference between these two prices. You buy units at the offer price and sell units at the bid price. If you have a $10,000 to buy units and you buy units in a fund that that applies a 5% bid offer spread, the units you receive will be to the value of $9,500, representing that you have paid $500 to the fund house as an entry charge. This covers the fund’s administration costs and/or they may choose to use this as a commission payment.
This is an upfront charge similar to the bid offer spread, but is the term used in respect of a single priced fund, such as an OEIC or SICAV. If you have $10,000 to buy shares and you buy shares in a fund that applies a 5% initial charge, the shares you receive will be to the value of $9,500, representing that you have paid $500 to the fund house as an entry charge.
Some funds may apply a performance fee which is payable when the investment manager generates positive returns over a stipulated threshold, often called a hurdle rate. This fee is deducted over and above the AMC and is awarded to the manager for achieving certain performance levels in a set period of time. It’s essentially an incentive for the manager to perform well. For example, you might see a performance fee of 15% or 20% stated and this will be based on the funds profits over the hurdle rate. Performance fees can be calculated in many ways and will be documented in the fund’s Prospectus.
This fee might be imposed by a fund when you redeem some or all of your shares in it. Not all funds charge this and it will be documented in the fund’s Prospectus if it is payable.
Contingent deferred sales charge (“CDSC”)
Some funds offer a CDSC share class and instead of charging you an initial, up front charge when you purchase shares, it has a fee that is only payable if you exit the fund after a certain specified period. The fee reduces on a sliding scale over a time period, typically 5 years.
As a simple example, if a CDSC is 5% and applied over 5 years and you exit in the first year, you will pay a 5% penalty on redemption. If you exit in the 5th year you will pay a 1% penalty on redemption. The fees generally expire after the specified time period and quite often your shares will then automatically be transferred to a non-CDSC share class. For this type of share class, overall expenses of the fund may be higher than others.