Unit trusts levy charges on their investors to pay for management and administration costs, marketing, and commissions paid to independent and company advisers.
They impose these charges in three ways:
Charges are an important consideration when you invest (though not the most important consideration). If you want to know what they are, either ask the manager for the marketing literature of the trust, or look in the Authorised Funds section of the Financial Times.
Note that the managers can only levy the charges indicated in the trust deed. It sets out the basis of charging and the maximum charges. Any increase in charges inside these limits require the managers to give 90 days notice to unit holders. If the managers want to go above those limits they have to get the approval of unitholders first.
An initial charge is an upfront fee paid by investors when they buy units in a trust. If there is an initial charge (not all trusts have them) it will be expressed as a percentage, and included in the offer price.
Whether or not a trust has an initial charge will depend on the asset classes it invests in (e.g. equities or bonds), the market spread of the underlying assets, dealing costs and commissions paid to intermediaries like IFAs and company representatives.
In general, expect equity unit trusts to carry the highest initial charge, followed by gilt and fixed interest funds. Cash, money market and tracker funds do not normally have an initial charge.
Some unit trusts forego the initial charge in favour of a sliding scale of exit charges levied on sale of the units within a given period from the date of purchase (e.g. 4 years). The earlier you sell them, the higher the exit charge as a percentage of your invested money.
The annual management charge covers the running expenses of the fund (e.g. audit and trustees' fees, administration and investment management) and any renewal commission paid to intermediaries.
Annual charges on equity funds are typically 1 to 1.5% p.a.. They are lower on gilt, corporate bond and cash funds. Overseas trusts tend to charge the most and fixed interest and tracker funds the least.
The level of the annual management charge is more significant to the investor in the longer term than the initial and exit charges, because it is ongoing and rises with the growth of the fund.
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