Fund buy and sell prices questions...

love2learn

Hi,

Why do managed funds have such a large difference between there buy and sell price?

The reason I ask this is, the fund supermarkets claims to offer 100% discount on the initial charge for buying into a fund. But if you buy into the fund, and wanted to sell later you typically lose 5% straight away as there is usually around 5% difference in the buy and sell prices.

I can't understand why this is? When I trade FTSE 100 stocks there is rarely a difference of that amount between buy and sell. Is this the fund managers attempting to lock you in to their fund?

I wanted the freedom to switch between riskier to non riskier investment funds if and when required due to market events, but that would make it pointless unless the fund was likely to drop in a big way like in a recession.

Thanks in advance for reading and replying....

cepheus

The so called 'initial charge' effectively accounts for most of that spread. If you wan't the full explanation and an example, see the quote below given me by a discount broker.

However the bottom line is that for many unit trusts, providing you get the full discount you shouldn't usually pay much spread and no stamp duty.

Unit trusts are dual-priced investments with both a bid (selling) and offer (buying) price, the difference between the two is known as the bid-offer spread. The bid-offer spread includes the initial charge and all costs to buy and sell a unit. The lowest price that a new unit can be purchased at is a separate creation price between the bid and offer prices. The creation price is the bid price plus any addition charges for creating the new units. With the full saving on the fund offered by Hargreaves Lansdown there would be no initial charge hence you would purchase units at exactly the creation price. If you purchased a new unit in a Unit Trust with a full initial charge discount and then sold it the following day (assuming no price movement) the loss would be the spread between the creation and the bid price.

To give an idea of these figures the creation and bid prices for Blackrock absolute alpha on 19 March are as follows;


Creation price, 115.9 pence
Bid price, 115.7 pence

This corresponds to a total 'charge' or 'spread' of 0.17% which looks reasonable.

From post 31
https://forums.moneysavingexpert.com/discussion/799879

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love2learn

I think I'm getting what you mean. So basically if I buy and sell through a provider such as HL, and they give a 100% discount on the initial fund charge and then sell the next day (assuming no price movement) I wouldn't lose 5% selling the following day.


For example.. The Marlborough Special Situations fund shows A buy Price: 702.45p and a sell price of 663.82 the difference between these two price is 5.82% (rounded).

Would I be right in thinking that since there's a 100% discount on the initial investment charge for this fund, the buy and sell prices would be more close together, with something like this...
702.45
702.25 (just an example)

To simplify it for my peace of mind, with the 100% discount on buying funds it makes buying and selling funds similar to buying and selling stocks with an offer and bid price relatively close together?

cepheus

I would guess it would be greater than that since percentage wise that is very small.

It should be made clearer and transparent though, and because they can't tell you the exact spread until the transaction goes ahead they are reluctant to give any figure at all, but it is usually nearer 0.2% than 2% when a full discount is provided. In a few cases, especially if the market is moving fast or the underlying stock is illiquid the spreads can be far wider though.

Thrugelmir

love2learn wrote: »

I can't understand why this is? When I trade FTSE 100 stocks there is rarely a difference of that amount between buy and sell.

How small a spread?

Reaper

love2learn wrote: »

For example.. The Marlborough Special Situations fund shows A buy Price: 702.45p and a sell price of 663.82 the difference between these two price is 5.82% (rounded).

Would I be right in thinking that since there's a 100% discount on the initial investment charge for this fund, the buy and sell prices would be more close together, with something like this...
702.45
702.25 (just an example)

Yes but the other way round - it is the buy price that is discounted, not the sell price. So as HL discount by 5% on this fund it would bring the buy price down to 667.33

In theory when the full initial charge is discounted you could indeed buy and sell immediately with no loss, but sometimes the spread can be stretched on a unit trust and a charge creeps in. You will fare better avoiding buy/sell charges on OIEC type funds rather than Unit Trusts.

dunstonh

Why do managed funds have such a large difference between there buy and sell price?

Most funds are OEICs nowadays. So, you wont get a spread. It would still apply to unit trusts though.

If you are referring to initial charges, then they typically apply equally to managed and trackers (unless buying direct where terms may be worse or better depending on fund house).

Totton

There's a hidden spread in OEIC pricing but you don't need to worry about any of this unless dealing with the fund company direct. I wouldn't worry about it :-)