UK Index Trust

First of all, what index?

A tracker may be cheap but pick the wrong index and that cheapness has earned you nothing. (5 years ago a FTSE100 tracker with 5000 invested would have around £5100 in it. A FTSE250 tracker would be closer to £8000). Most managed funds have managed to beat FTSE100 trackers over the last 5 years. Going cheap isnt always the best thing. Pick the area(s) to invest first, then pick the the funds and consider the charges.

Could you give us information on the fund and provider?

marrioa wrote:

One of the funds is the UK Index Trust which has no initial fees and 0.5% annual management charge. The effect of deductions after 10 years @ £50 a month is £230.

50 pounds a month is 600 pounds a year
600 pounds @ 0.5% = 3 pounds a year
3 pounds a year X 10 years = 30 pounds

But the "effect of charges" is 230 pounds.

That's equivalent to 23 pounds a year,almost eight times as much as you might think from reading there is an 0.5% annual charge.

That's why the "effect of charges" is important.

Over on the Fidelity funds network site they have some info on this L&G fund in the charges section, including the fact of an 0.9% bid offer spread which I hadn't heard mentioned before.

Initial amount invested £1,000
Normal initial charge 0.00%
FundsNetwork™ direct initial charge 0.00%
You save 0.00%
Additional bid-offer spread 0.91%
Annual management charge 0.50%
Other annual expenses 0.02%
End year/ Investment to date/ Effect of deductions to date/ What you might get back at 6.0%
1 £1,000 £15 £1,040
3 £1,000 £30 £1,160
5 £1,000 £48 £1,290
10 £1,000 £111 £1,680

The last line in the table shows that over 10 years, the effect of total charges and expenses could amount to £111. Putting this another way, this would have the effect of bringing the illustrated investment growth rate down from 6.0% to 5.3% a year.

Note they quote 6% for the standard unit trust.

Quite frankly a growth rate of 5.3% a year if compared with cash @4% does not present anything like an adequate risk premium IMHO, especially considering that trackers are a fairly high risk way of investing in equities.

Quite frankly a growth rate of 5.3% a year if compared with cash @4% does not present anything like an adequate risk premium IMHO, especially considering that trackers are a fairly high risk way of investing in equities.

6% is the required growth rate to be quoted on all unit trust/OEICs. It doesnt mean the fund is going to perform to 6%.

The L&G fund grew by 23.16% in the 12 months from 1 feb 05 to 31st Jan 06. So, take your 0.7% reduction in yield and you still got in excess of 22%.

All that being said, it isnt a fund I would have.

Probably a good idea to diversify a bit more. This will include areas that dont have trackers but then your investment choice should never be based on charges as first priority.

We cannot really advise you as to what funds as we dont know your risk profile, we dont know the amounts involved, we dont know the timescales and we dont know your ISA provider. Although it appears you like L&G!