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You gotta pay money to make money. That's a fact of life in the investment business. But just how much you pay is another matter entirely.
In general you pay two different fees when you buy share-based investments such as unit trusts.
• A one-off initial charge, which pays for expenses, and commission if you buy through an adviser or salesman, and
• An annual charge, which is where the fund management company makes most of its money.
Initial charges on unit trusts have been traditionally around the 5% mark. Some specialist fund charge more, others, especially trackers, should charge much less. Annual charges have been creeping up; Traditionally there were around 1%, but now 1.25%-1.5% is becoming common.
The investment company has to tell you about these charges. The key-features document will list them for you. This document will also reveal that the charges might be a bit higher than these actual values due to other miscellaneous charges.
So should you worry?
The answer is quite possibly. In a low inflation world, charges like these take a huge bite out of your capital. And worse still, there is no real correlation between funds with higher than average charges and funds with better than average performance.
On the other hand, don't get too obsessed about charges - choosing a good performing fund for the medium to long term is much more important - a choice, remember, which is not the same as choosing the best performer last year!
The good news is that there is a lot you can do to cut the cost of investing.
• If you want a solid, unspectacular fund which is ideal for first time investors, consider an investment trust such as Foreign & Colonial, Witan, or Alliance Trust. These invest internationally, and because they pay no commission, charges here are much lower. F&C charges £50 up front, and then £0 a year, which is good value if you put the full £7,000 in, but less so on smaller amounts. Alliance Trust charges just 0.75% a year.
• If you can manage without personal advice - any many investors can - do it yourself. That means doing your own research and deciding what fund you want to buy for your Isa - using our chart above - and then buying through a-so called execution only broker.
Many will reinvest all the up-front commission for you. At Best Investment for example, 5%ish charges become around 0.5-1%.
Chartwell charges a flat £20 and rebates all the upfront commission, plus half the annual commission. Chelsea Financial is another firm offering this kind of service. This is possible because they deal in bulk and get concessions from fund groups which individuals cannot.
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Chartwell Investment Management
