Understanding Ongoing Charges: Why Low-Cost Funds Win Long-Term

The Hidden Cost That Silently Erodes Your Returns

Every investment fund charges an ongoing fee to cover the costs of running the fund. For actively managed funds, this covers the fund manager's salary, research teams, trading costs, and marketing. For index funds, it covers the far simpler task of replicating a market index. This annual charge — expressed as the Ongoing Charges Figure, or OCF — may seem small in isolation, but its compounding impact over a long investment horizon is enormous.

What the OCF Includes

The OCF — formerly called the Total Expense Ratio or TER — is a standardised measure of a fund's annual operating costs expressed as a percentage of the fund's assets. It includes the annual management fee charged by the fund manager, administration costs, custody fees for holding the underlying assets, audit fees, and regulatory costs. The OCF does not include dealing costs within the fund — the costs the fund incurs when buying and selling securities — though these are disclosed separately as transaction costs in the fund's Key Investor Information Document.

OCF Ranges for Different Fund Types

Passive index ETFs tracking broad indices: 0.03 to 0.22 per cent per year. Passive index unit trusts: 0.06 to 0.30 per cent. Active UK equity funds: 0.65 to 1.20 per cent. Active global equity funds: 0.75 to 1.50 per cent. Some multi-manager or fund-of-funds structures charge 1.50 to 2.00 per cent or more. The difference between 0.15 per cent and 1.20 per cent might appear to be just over 1 percentage point — but over 30 years, this gap translates into a dramatically different final portfolio value.

The Real Cost of High Charges: A 30-Year Comparison

Suppose two investors each put £10,000 into funds that both achieve gross returns of 8 per cent per year before charges. Investor A chooses a global index ETF with an OCF of 0.15 per cent, achieving a net return of 7.85 per cent. After 30 years, their £10,000 grows to approximately £95,000. Investor B chooses an actively managed fund with an OCF of 1.15 per cent, achieving a net return of 6.85 per cent. After 30 years, their £10,000 grows to approximately £72,000. The fee difference of 1 per cent costs Investor B approximately £23,000 over 30 years — more than twice their original investment.

Platform Fees Add to the Total Cost

The OCF is not the only fee UK investors pay. Platform fees charged by your investment platform add to the total cost of ownership. On Hargreaves Lansdown, a 0.45 per cent platform fee on top of a 0.22 per cent fund OCF gives a total annual cost of 0.67 per cent. On InvestEngine, a zero platform fee with the same 0.22 per cent ETF OCF gives a total of just 0.22 per cent. Comparing total costs — platform fee plus OCF — rather than just one or the other is essential when evaluating the true cost of an investment strategy.

Why Low-Cost Funds Win: The Arithmetic of Investing

In any given year, the total return of all investors in a market — before costs — must equal the market's gross return. After costs, the aggregate return of all investors must be below the market's gross return. This means that the average active fund investor must underperform the index by exactly the amount of fees charged. Low-cost index fund investors, charging minimal fees, capture close to the full market return. Higher-cost active investors start at a structural disadvantage that most fail to overcome.

How to Find and Compare OCFs

The OCF for any UK fund is published in the Key Investor Information Document (KIID) — a standardised two-page summary document available on the fund manager's website and on platform fund pages. When evaluating any fund, always check the OCF before investing. For most broad market index funds and ETFs, an OCF below 0.20 per cent should be your target. For specialist or thematic funds, somewhat higher charges may be justified, but anything above 0.50 per cent deserves careful scrutiny of whether the investment genuinely offers something unavailable at lower cost.