Our top tips to save you money
1 Compare the market
Each investment charge applied by a fund ultimately eats into returns and when you learn that some funds apply as many as 14 layers of charges, you’ll see why it’s so important to invest as cost effectively as possible. Different investment funds will have different charging structures, which will also differ according to where they are purchased. For example, funds bought via a fund platform may be cheaper than if purchased directly. So, it’s worthwhile shopping around in the same way you would for a car or for home insurance. Most funds, as a minimum,levy an annual management charge – typically between 1 and 2 per cent – but there may also be initial charges and dealing charges tucked away, among others. If you can, get hold of the total expense ratio (TER) which will allow you to compare costs between funds.
2 Use a “passive” fund
The idea of a passive fund is to mirror the investment performance of a particular asset class or investment sector. They allow highly accurate asset allocation to be achieved, but at a fraction of the cost of an actively managed fund. However, such funds will only ever reflect the underlying assets class benchmark and they track negative movements as faithfully as positive ones.
One of the best ways to access passive funds is via Exchange Traded Funds (ETFs). ETFs are traded on the stock exchange so don’t incur dealing and stamp duty fees so fund costs are kept to a minimum. But used as part of a diversified portfolio in conjunction with actively managed funds, their lower cost makes them attractive.
3 Make use of your Isa allowance
Using your Isa allowance means paying less or no tax, which immediately improves the overall return on your investments. Interest-bearing funds such as corporate bonds and fixed interest are particularly attractive funds to hold within an Isa as they incur no additional tax (unlike dividend paying funds).
It’s important therefore to review your investments and find out if you could be moving existing funds to an Isa.
4 Invest monthly
Investing on a monthly basis means your contribution buys more shares when prices are low, which helps to balance out the lower number of shares purchased when the market prices are higher. You benefit when the price is high as your fund grows in value but you also benefit when the price is low as you are able to buy more units.
This is known as pound cost averaging. So, if you regularly invest £100 into a fund, buying units at a price of £5 each, when the price falls to £3 you will be buying more units for your money.
• Kevin Garfagnini is director at Mazars Financial Planning