Lesson 4 of 5
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Fund management fees often appear as a fraction of a percent on a factsheet. That small number can still make a meaningful difference over time because costs are one of the few variables you can identify upfront, and they compound against you each year you hold a fund.
Understanding what you pay, where those charges come from and how they reduce what you keep helps you compare funds more clearly. This article breaks down the main cost types, shows how they stack up and sets out a simple method for comparing total cost.
When you see a fund quoted at 0.2% or 0.75%, it can feel too small to matter. Against the backdrop of market moves, a fraction of a percent looks like noise. But there is a key difference between costs and returns: returns are uncertain, while costs are typically known in advance. However, charges can change over time and transaction costs vary; some products may also have performance or one-off charges.
Fees are deducted year after year. That deduction reduces the amount left to compound, so the long-term gap between a lower-cost and higher-cost fund can be larger than many beginners expect.
The value of investments can fall as well as rise. You may get back less than you invest. But while you cannot control market direction, you can compare costs before taking exposure. Lower cost can help, but it doesn’t make a fund ‘better’ on its own; also consider risk, strategy fit and diversification.
Fund costs are the total amounts deducted for running and holding a fund. They are not a single headline number.
Some costs sit inside the fund and are deducted from the fund’s assets, so you do not usually receive a separate bill. Separately, you may also pay a fee to the platform or investment service that holds the fund for you. These are different charges, and both can apply at the same time.
That boundary matters when you compare funds. If you only look at one number, you may miss costs that change the overall price of holding a fund.
Ongoing charges figure (OCF): The OCF is the annual cost of running a fund, expressed as a percentage. It typically includes the fund manager’s fee and certain administrative and operating expenses. The OCF is deducted from the fund itself, rather than invoiced to you directly, so its effect is usually seen through performance that is already net of these charges.
Platform fees: Platform fees are charged by the provider that holds your investment. They sit outside the fund and apply on top of the OCF. They may be a percentage of the value you hold, a flat fee or a combination, depending on the service.
Fund transaction costs: Fund transaction costs arise when the fund buys and sells underlying investments. These dealing costs and spreads are not included in the OCF and are typically disclosed separately. They can also vary over time, because they depend on how much the fund trades.
Compounding impact (cost drag): Fees reduce your holding a little each year, but that reduction can widen over time because future growth builds on a smaller base. If two funds deliver the same gross return before costs, the one with the lower total cost leaves more invested to compound forward.
Assume you invest £10,000 in two funds with similar strategies. Both deliver a gross return of 6% a year before costs. All figures here are illustrative assumptions, not forecasts, and they are intended to show how fees affect investment returns over time.
Fund A total annual cost (made up of the OCF, platform fees and fund transaction costs): 0.3%
Fund B total annual cost: 1.3%
If you apply those annual costs each year and assume the same 6% gross return:
With no costs at all (for comparison), £10,000 growing at 6% for 20 years would be about £32,100.
Fund A (net return about 5.7% after total costs) would grow to about £30,300.
Fund B (net return about 4.7% after total costs) would grow to about £25,100.
On the same gross return assumption, Fund A ends up around £5,200 higher than Fund B after 20 years. The difference is the cost drag compounding over time.
Transaction costs vary year to year and are not a fixed fee; platform fees are charged separately by the platform and the mechanism differs by provider. The example simplifies by treating them as an annual percentage for illustration.
If you want to judge how fees affect investment returns in your own comparisons, focus on building a like-for-like total cost figure.
Find the OCF on the fund’s factsheet, Key Investor Information (KID/KIID, depending on the product) or Product Summary. It is usually listed in a charges section.
Look for transaction costs on the same documents. They are commonly shown separately, because they sit outside the OCF.
Add your platform fee. This is set by the service that holds the fund, not the fund manager, so you will typically find it in the platform’s pricing information rather than in the fund documents.
Compare total cost between similar funds. If two funds offer broadly similar exposure, total cost can be a practical way to compare what you are likely to pay to hold each one. Be careful not to compare costs across funds with very different objectives or strategies, because the price is only one part of what you are choosing.
Note: A new ‘Consumer Composite Investments’ regime will eventually replace both the KID and KIID with a single ‘Product Summary’; this began in April 2026 and has a final compliance deadline of 8 June 2027.
This is educational information, not personal advice or a recommendation.
Comparing only the headline OCF: The OCF is often the most visible figure, but platform fees and transaction costs can also change the overall cost of holding the fund.
Assuming a higher fee signals better performance: There is no reliable evidence that higher fees lead to higher returns. A higher fee guarantees you pay more, not that you will receive a higher return.
Treating a fraction of a percent as too small to matter: Over short periods, the difference may look minor. Over longer holding periods, the compounding effect can make the gap meaningful.
Expecting costs to show up as a bill: Many fund-level costs are deducted within the fund, so you may not see a separate payment leaving your account. That is why it helps to read the documents and do the comparison yourself.
Fund costs are more than one number: the OCF, platform fee and transaction costs can all apply.
Costs are typically known in advance, while returns are uncertain, so fees are one of the few variables you can compare upfront.
A small annual charge can compound into a meaningful difference over decades.
Compare total cost between similar funds rather than relying on the headline figure alone.
Higher cost does not reliably buy a higher return.
The ongoing charges figure is the annual cost of running the fund and is deducted from the fund’s assets. A platform fee is a separate charge from the service that holds your investment. Both can apply when you hold a fund through a platform.
No. Transaction costs relate to dealing when the fund buys and sells holdings in its portfolio. They are typically disclosed separately from the OCF on the factsheet, Key Investor Information Document or Product Summary.
Not reliably. Paying more increases your costs, but it does not guarantee better performance. Higher fees may reflect a particular approach or level of activity, but outcomes can still vary.
Even small annual differences can add up over long holding periods because fees reduce the amount that compounds. The longer you hold, the more the gap can widen, assuming the same gross return before costs.
