Unit Trusts: Understanding Unit Trust Costs

This article breaks down the various cost elements involved in unit trust investing.

U nit trusts can be effective investment vehicles - but before you put your money in a unit trust or open-ended investment companies (OEIC) it is advisable to be aware of the attached charges.

Management fees

Most unit trusts cite management fees as a percentage of the fund's assets, and subtract them on a daily basis. They are generally 1 per cent and above and are an important revenue for the fund company. Fees differ vastly between unit trusts. They tend to be higher for equity-orientated funds than those for fixed income funds. When enquiring about your unit trust's management fees, bear in mind that fees for passively managed funds such as index funds should be lower.

Sales Charge

Also referred to as a 'service fee' or 'front end load', a service charge is the payment you make when you invest in a unit trust. A major part of this money goes towards the marketing and distribution of the fund. Sales charges can be calculated by working out the difference between the buying and selling prices quoted by a unit trust and are included as a percentage in the fund's net asset value.

Repurchase Charge

A repurchase charge (or 'exit fee') is charged when you redeem your units in a fund. In the case of bond funds and some other unit trusts, repurchase charges are generally levied if you redeem your units before a specified period. The longer you keep your money in a fund, the less you will have to pay upon exit.

Trustee Fees

The responsibility of a unit trust trustee is to regulate the fund and safeguard investor interest. For this job, they are paid a trustee fee which can be anything from 0.08 per cent to 0.2 per cent per annum.

Management Expense Ratio (MER)

The entire cost of managing a unit trust will be taken from the fund and cited as a percentage of the fund's net assets. The MER can include management fees, trustee fees, audit fees, commission paid to brokers and other costs such as advertising and printing. MERs can vary between companies. Larger funds generally have lower MERs due to their scale.

It is important to ask in detail about the costs of investing in a unit fund before you commit yourself. It's worth using a company like Legal and General to compare unit trusts and judge the level of expense that is usual. Your research will ensure that you do not pay too high to keep your money in a unit trust.

The opinions and statements expressed in this paid article reflect those of its authors and not those of AlphaProfit.

To increase your investment returns in bull and bear markets, learn more about AlphaProfit and subscribe to the AlphaProfit Sector Investors' Newsletter.