Costs are an important consideration when investing. The greater the costs, the harder your investments have to work to deliver you a return.

Typically, there are two types of costs when investing in investment trusts:

• Internal costs – the costs and charges of the investment trust itself, for example the annual management fee that goes to pay the fund manager.
• External costs – costs and charges outside the investment trust, for example, dealing commission when you buy and sell investment trust shares.

The internal and external costs together add up to your total cost of investing.

Internal costs: the costs of running an investment trust

Internal costs are paid out of the assets of an investment trust. For most investment trusts, they are likely to include the following:

• Annual management charge – paid to the fund management group that manages the portfolio of the investment trust from day to day. Most annual management charges fall somewhere between 0.5% and 1.5%. Some investment trusts will also pay the fund management group a performance fee if the trust's performance exceeds an agreed target.
• Transaction costs – when the fund manager buys and sells assets within the investment trust's portfolio.
• Gearing costs – if the investment trust uses gearing. This might be, for example, interest paid on a bank loan that the investment trust has taken out.
• Fees of professional services firms – such as accountants and lawyers.
• The fees of the board directors.
• Costs of holding shareholders’ meetings.
• Costs of producing the annual and semi-annual report – and other shareholder communications.
• Other administration costs.

You can find out about all the costs incurred by an investment trust in its annual accounts.

When you see performance figures quoted for an investment trust, all these costs will already have been taken out. You are seeing the net figure (after internal costs).

External costs: costs outside the investment trust

External costs are paid directly by you, the investor. They don’t come out of the assets of the investment trust.

Typical external costs might include:

• Dealing commission – when you buy or sell shares using a platform or broker. This varies considerably but a typical amount would be approximately £10 per deal.
• Dealing spread – is the difference between the ‘buy’ price and the ‘sell’ price (known as ‘bid’ and ‘offer’).
• Stamp duty – when you buy shares in UK-based investment trusts. This is 0.5% of the purchase amount, and is paid only when you buy (not when you sell). So when you buy £100 of shares you pay 50p stamp duty.
• Any other taxes – you have to pay on income or gains.
• Platform charges – most investors now hold their investment trust shares on platforms. On a platform, you’ll typically pay admin charges as well as dealing commission. The AIC offers comprehensive data on charges for holding investment trusts on platforms.
• The cost of financial advice – if you are using an adviser.

Two people investing in the same investment trust will pay the same internal costs, but their external costs might be very different depending on the platform or broker they use, whether or not they use a financial adviser, and their tax position.

Where do I find out about costs?

You can find out about the internal costs of investment trusts on this website. We can’t provide comprehensive information on external costs, as they depend on the investor’s choices, such as how often they buy and sell shares, but we do maintain cost comparison tables which give you an idea of what platforms will charge you to buy, sell or hold investment trusts.

When it comes to internal costs, you can look up the AIC ongoing charge for any member investment trusts.

The ongoing charge

The ongoing charge has been designed to make it easy for you to compare the costs of investment trusts with other funds, such as open-ended funds. It is made up of the regular, recurring costs of running an investment trust, such as:

• The annual management charge.
• Fees of professional services firms – such as auditors.
• The fees of board members.
• Administration costs.

The AIC ongoing charge is backward-looking. It calculates costs for the last financial year, and divides these by the net assets of the company to produce a percentage figure.

See exactly how the ongoing charge is calculated.

The ongoing charge does not include performance fees. On this website, you can find a figure called ongoing charge plus performance fee, which includes the performance fees paid in the last financial year. Where this figure is the same as the ongoing charge, it means no performance fees were paid.

Finally, you’ll find details of the management agreement between the investment trust and its manager, which sets out what annual charges apply, and whether there is a performance fee.

The ongoing charge does not include transaction costs, which are the costs paid when a fund manager buys or sells assets within the investment trust’s portfolio. It also excludes gearing costs.

Charges on Key Information Documents

Since 1 January 2018, investment trusts have been required to produce Key Information Documents (KIDs). The charges disclosed on these KIDs vary from the AIC ongoing charge.

There are two main differences between the KID charge and the ongoing charge:

• KID charges attempt to be forward-looking, to give you an idea of what you may pay in future, whereas the ongoing charge gives you the real costs paid in the previous financial year.
• KID charges include transaction costs, gearing costs and performance fees (where paid), which are not included in the ongoing charge.

The AIC believes that there are various problems with KIDs. One of these is that open-ended funds have been told they do not have to produce KIDs yet. In the meantime, they will continue to produce a different sort of document called the Key Investor Information Document (KIID), which discloses charges on a different basis.

KIDs and KIIDs may sound similar, but in reality the cost disclosures on the two documents are very different! This raises the risk of misleading “apples and pears” comparisons being made between the costs of investment trusts and open-ended funds.

The AIC will continue to display the ongoing charge on its website, to allow investors to make informed comparisons between the costs of investment trusts and those of open-ended funds.

How can I keep my costs down?

Costs have a big impact on investing, especially over long periods. Let’s say you invested £10,000 for ten years and markets returned 6% a year. If your charges were 0.5% a year, your return would be £17,081 over the ten-year period. But with charges of 1% a year, your return goes down to £16,289 – a difference of £792.

When you choose an investment trusts, you should carefully consider that trust’s costs. Bear in mind that investment trusts that invest in more specialist assets (such as property, private equity or infrastructure) are likely to have higher charges than those that invest in more conventional assets such as shares or bonds. So it may help to compare an investment trust's charges with others in its AIC sector.

Large investment trusts often have lower costs than smaller ones. This is due to economies of scale, which are often passed on to shareholders as trusts grow. Remember that external costs, such as platform costs, matter too. You can compare the costs of different platforms when holding investment trusts on this website.