Choosing a good stock or fund is tough enough for most armchair investors – but grappling with financial jargon makes the job even harder.
For instance, you need to know the difference between and dirty funds, while understanding how income and accumulation affects your portfolio is a must.
Financial rules changed in April 2014 that stopped advisers taking commission which was often paid out of the fund charges.
Now, British investors pay their advisers direct, but the no commission is deducted, instead they hand over a fee – or do they?
Clean funds are those where investors pay no commission from fund charges, while dirty funds are those from pre-April 2014 that still follow the old rules.
Clean and dirty funds
But investors have to watch out. They are still buying dirty funds if they are offered a loyalty bonus, which is simply the adviser repaying the commission they are not allowed to take.
Investors can switch dirty funds to clean ones, but need to watch out their advisers or funding platforms do not work a smart trick by manipulating the rates to cover their margins.
Not every adviser will automatically switch dirty to clean funds without direct instructions, so to save some cash check out any old funds to see if they are dirty.
Knowing the difference can make a big difference to an investor’s wealth. Income funds pay dividends that can be taken as income or left in the fund for reinvestment.
Income units in a fund pay any earnings back to investors, generally quarterly, half-yearly or annually. Some even pay monthly.
Income and accumulation
However accumulation units take those dividends and spend the cash on buying more units in the same fund.
If you are an investor looking for income, the letters ‘inc’ at the end of the fund name are the ones to watch for.
However, if you are reinvesting to grow your fund, look for the tell-tale ‘acc’ for accumulation in the fund name.
Another source of confusion is the sale price of fund units – generally the ‘bid’ is the selling price and the ‘offer’ the buying price.
Many fund managers set their prices as lunchtime on a working day, which means buying after lunch means getting tomorrow lunchtime’s price. If you want certainty, buy in the morning because you will always know the price.