funds - where do i start

jamesd

westy69, you can put in in as cash using this year's allowance and choose a fund later.

But there's no need to choose just one fund. HL will accept written instructions down to 250 or lower even though online the minimum is 1,000.

Also when selling some of a fund you can choose an option to sell and buy others. You choose how many Pounds worth you want to sell and how to split that among the other funds that you want to buy. That split can be far less than 1,000. 50 is fine, even 25.

So you could pick a fund like BlackRock UK Absolute Alpha now and gradually sell it in chunks of 100 or 200 Pounds to get regular quarterly investing in a range of other funds.

There's a small extra cost for this. You pay 0.5% stamp duty when you buy a fund and so buying one then selling it to buy others costs you a second lot of 0.5%. But since the BlackRock fund will probably have gone up a little in value that's likely to beat keeping the money in cash.

If you're not going to come close to reaching the ISA limit in the next tax year you could also go with the option of setting up a regular monthly investment. HL's limit for that is a minimum of 50 per fund per month.

Hargreaves Lansdown use 50 as the point at which they buy funds with dividend money when you choose to have it automatically reinvested so that's a fair indication of the minimum value at which they think it's worth their cost of buying something.

So, however you choose to do it, there's no need to constrain yourself to just one fund. You can get at least a reasonable mixture of five or so.

Even if you can't open the same day online using a debit card for some reason HL will probably have it opened within a day or two of receiving a letter from you.

nicko33

jamesd wrote: »

You pay 0.5% stamp duty when you buy a fund.

Do you?

meester

nicko33 wrote: »

Do you?

No you don't.

In addition, you can 'trade' OEICs quite effectively if the initial charge is discounted to zero, you really do get in and out 'for free', effectively retaining 100% of the growth (or fall of course) of the fund.

jamesd

nicko33, yes you do but it won't be an itemised cost. Even where there is a 5% initial charge and a 5% discount you'll find that you get less units in a unit trust than you would expect due to the dealing costs, including stamp duty, that the fund manager pays when creating the units. The initial charge goes away but those costs don't. If you ask HL they will talk about the creation price, which includes these costs.

OEICs are handled somewhat differently, with a single price that includes these costs as part of the price. In this case you may be able to buy and sell without losing a little money along the way, depending on how the balance between the number of buyers and sellers moves the spread that's incorporated into the price (as the difference between the cost of the shares and the single price of the OEIC).

This is fairly trivial - a maximum of five Pounds plus dealing costs for your 1,000 - but I just didn't want you to think that there was no cost for buying one fund then selling it to split into smaller purchase amounts.

westy69

my god this is confusing to me, thank you for the answers so far very much appreciated :beer: , its no wonder people use IFA's but then if they have an experience like my previous with an IFA they decide on a bit of DIY, i guess once you have got your head around it it begins to make sense

i have just spoken to HL i am going to go with the vantage high intrest option initially (1k), the adviser at HL said you can set up a regular DD min pm £100.00 and it should be ok to put that into 2 different funds (as min is £50 per fund) and there is no commitment to that DD ie 12 month contract..... is that other peoples understanding as well? ie have i understood that correctly?

meester

jamesd wrote: »

nicko33, yes you do but it won't be an itemised cost. Even where there is a 5% initial charge and a 5% discount you'll find that you get less units in a unit trust than you would expect due to the dealing costs, including stamp duty, that the fund manager pays when creating the units. The initial charge goes away but those costs don't. If you ask HL they will talk about the creation price, which includes these costs.

They may or may not go away.

When you buy a unit trust, then yes, the fund manager will have costs of 0.5% stamp duty + bid/offer spread on the shares on your investment.

But you do not pay these costs in the same way that you would if you bought them yourself.

You have bought say 500 units, but there are potentially billions in issue.

The costs are paid for by the billion, not just by you. The cost of investing your money is somewhere over 0.5% of the value of YOUR money, but as a cost for each unit (including yours), it is more like 0.0000005%, i.e. ~zero.

The creation price is not important as much as the discounted offer price relative to the bid price, because as I have said, an investor does not individually bear the cost of creation - the money is not ring-fenced. The creation price is almost never the same as the discounted offer price.

A few examples:

Aberdeen Charity Select UK Equity:
http://www.trustnet.com/ut/funds/?fund=9711

100% in equities, 0% initial charge, yet bid/offer is 99.63/100p

Clearly you (being a charity in this case) don't pay the stamp duty, you do pay roughly 0.37%. The creation cost of your units, unless large relative to funds already under investment averages out to approximately zero. You have however been CHARGED 0.37% to get in.

In the case of BlackRock Absolute Alpha, they appear to be paying you to invest.

http://www.trustnet.com/ut/funds/?fund=5930

Bid/offer is 134/140.9p (institutional class) and 115.8p/121.6p (retail). The discounted offer price (minus 5%) works out 133.855p and 115.52p.

OEICs are handled somewhat differently, with a single price that includes these costs as part of the price. In this case you may be able to buy and sell without losing a little money along the way, depending on how the balance between the number of buyers and sellers moves the spread that's incorporated into the price (as the difference between the cost of the shares and the single price of the OEIC).

This is fairly trivial - a maximum of five Pounds plus dealing costs for your 1,000 - but I just didn't want you to think that there was no cost for buying one fund then selling it to split into smaller purchase amounts.

For OEIC switches with no initial charge, there should rarely be any cost of switching. The possible charges are:

dilution levies on buying
exit charges (aka dilution levy)
initial charges
swing pricing (according to the balance of buyers and sellers to try and balance costs)

The initial charge is very easy to find when you buy, and you can buy an OEIC that has it discounted to zero. So not too hard to deal with.

As I said above, the cost of your new units is ALWAYS charged to the fund; you never pay the stamp duty yourself, and the effective cost is usually zero when comparing a small retail investment with a large fund.

It's quite hard to find anything documenting actual policies on this, and charging.

Here's an S&P document from 2004

http://www.weknowbecauseyouknow.com/V2mod/site/pr/SPSwingpricing230604.pdf

It suggests (as of 2001)

"87% of firms that it surveyed had no automatic dilution recovery process and 92% only recovered the levy on large deals. "

A quick look shows virtually no fund levy exit charges. Trustnet don't even bother to quote them, they are so unusual. And the dilution levy is very unlikely to be levied either.

As for the swing pricing, "only a miniscule amount of companies have taken up the option of swing pricing ". This might have changed, but swing pricing is somewhat unlikely to affect you.

Fidelity say, on their offshore funds, which do have swing pricing: "The price adjustment policy will be activated if the day’s trading is likely to have the effect of decreasing the fund’s price by 0.05% or more", and adds
"

How often will the policy be activated?

This depends on levels of trading so it is likely to vary from fund to fund. It is worth remembering that the policy is designed as a response to volumes of trading that are out of the ordinary, so it is only likely to be implemented occasionally.
"

So for all the possible charges, the fact is, for an OEIC, you really can in most cases switch for free (where free is probably 0.00000005%, which is zero to most people), providing there is no initial charge - you make the other investors fit the bill.

Conversely, the irony is that a long-term (relative to the average length of holding including new purchasers) holder is better off, all else being equal, buying a Unit Trust or OEIC that levies an initial charge, because he is not subsidising the costs of all the traders.

jamesd

westy69, that's correct. No commitment at all and yes that means that you can do swap the funds a few times during the year to get a broader range if you want to. Just send them a letter with the new split whenever you want it to change.