P<\/span>reviously we\u2019ve run through how to open an online broker account<\/a> and how to buy and sell ETFs<\/a>.<\/p>\n Today we\u2019re going to look at purchasing an index tracker fund.<\/p>\n Next stop, the world \u2013\u00a0muhaha!<\/p>\n (Oops, did I say that out loud? I meant to write: \u2018Next step, a globally diversified passive portfolio\u2019\u2026)<\/p>\n An index tracker fund is typically an Open Ended Investment Company (OEIC).<\/p>\n In normal-person speak, this means a tracker fund is set-up as a company that you can buy and sell shares of.<\/p>\n Index trackers are \u2018open-ended\u2019 because the number of shares in the company will rise and fall when investors buy or sell them from the manager of the fund. Some tracker funds are still set up as Unit Trusts. These are structured as a trust rather than a company, and investors buy and sell units in the trust. Like OEICs these are also \u2018open-ended\u2019.<\/p>\n From an everyday investor\u2019s point of view, the two flavours mostly amount to the same thing.<\/p>\n We\u2019ll focus on OEICs, which we\u2019ll refer to simply as index funds from here.<\/p>\n Before buying anything, it\u2019s important you know how the market works.<\/p>\n Index funds are priced by a set formula based on the value of their assets.<\/p>\n Unlike ETFs or shares, a single-priced index fund has one published price for buyers and sellers. The price is calculated at a set time \u2013 called the valuation point \u2013 which for most funds is once each working day.<\/p>\n To complete your trade on a given day, you must do so before a cut-off time:<\/p>\n Note this means you might mistakenly think you\u2019re invested before your money has actually gone into your chosen fund. For example, you could put in a buy order on Tuesday afternoon. But it could be executed, say, at midday on Wednesday.<\/p>\n Normally being out of the market<\/a> for a few hours doesn\u2019t matter much. But if markets are making huge moves up or down, it might!<\/p>\n You can find an index fund\u2019s valuation point in its documentation<\/a>, or on your investment platform\u2019s research page under \u2018fund facts\u2019 or \u2018dealing deadlines\u2019.<\/p>\n Let\u2019s say you know what fund you want to own. For instance, you want to put \u00a31,000 into the Fidelity Index World (Acc) fund. (Here is its webpage<\/a>).<\/p>\n You\u2019re ready to put your money to work.<\/p>\n First you need to locate the fund you want to buy into. To find a fund, search for the fund\u2019s name or identifier \u2013 such as its ISIN, ticker, or platform fund code \u2013 on your platform.<\/p>\n Be persistent!<\/strong> Broker search tools can be shonky. A fund name can often be the easiest way to find a fund, rather than trying to hit on the required code. You might even have to resort to a Google search of your platform to find the fund page on its website, and then go from there. In all cases, triple-check the details to make certain you\u2019ve got the fund you want.<\/p>\n Here\u2019s that Fidelity World Index Fund located at Hargreaves Lansdown:<\/p>\n You can see the Buy and Sell prices are the same. That\u2019s because Fidelity Index World is a single-priced fund Note that this quoted price is the last traded price \u2013 not the price we\u2019ll pay.<\/p>\n As we saw above, an index fund is generally valued once a day, at its valuation point. Hence you\u2019ll only know the exact price you paid when your trade completes.<\/p>\n Having logged into the platform and clicked through to Invest Now, we see this screen:<\/p>\n Notice we\u2019re only confirming the total order value \u2013 here it\u2019s \u00a31,000 \u2013 and no price. Again, we won\u2019t know the exact price we paid until the deal is done.<\/p>\n Because OEICs have a single published price, there isn\u2019t a conventional bid-ask spread in the way there is with an ETF. The transaction costs are embedded in the fund\u2019s pricing, rather than through a spread. You\u2019ll also see that Hargreaves Lansdown will charge us \u00a31.95 to do the deal.<\/p>\n Here\u2019s some slightly geeky details.<\/p>\n When you buy or sell units in, say, an equity index fund, your fund manager may have to buy or sell the underlying company shares on your behalf. These transactions cost money<\/a> \u2013 racked up by things like dealing spreads, commissions, and the market impact of large trades. Now, if transaction costs were simply absorbed by the fund, then existing investors could end up paying for the trading activity of other investors.<\/p>\n That\u2019s called dilution, it\u2019s not really cricket, and so fund managers \u2013 and regulators \u2013 have devised ways to make sure the people who create the costs actually pay them.<\/p>\n For example, a fund might apply an explicit dilution levy.<\/p>\n Or, commonly with a single-priced fund, it can use swing pricing \u2013 also known as a dilution adjustment \u2013 to nudge the fund\u2019s published price up or down to reflect the estimated costs of dealing in the underlying investments.<\/p>\n The point is that while an OEIC may show one price rather than an ETF-style bid-offer spread, that doesn\u2019t mean buying and selling is costless<\/strong>. The costs of trading the underlying investments must still be paid somewhere.<\/p>\n The swing pricing mechanism is designed to protect long-term investors from subsidising other people\u2019s trading. The FCA\u2019s rules require any dilution adjustment or levy to be operated fairly and solely to reduce dilution \u2013 which is nice.<\/p>\n (Incidentally, if you Googled \u2018swing pricing\u2019 to read about the cover charges when throwing your keys into a bowl at a certain sort of party in Surbiton, well, each to their own.)<\/p>\n Many good brokers don\u2019t charge a dealing fee for trading index funds. Historically, this usually made index funds cheaper to buy than ETFs, where dealing fees were levied.<\/p>\n However with today\u2019s zero-commission<\/a> platforms, ETFs can also be bought without an explicit dealing charge.<\/p>\n Meanwhile some platforms do charge a fee for index fund dealing, as we saw above.<\/p>\n Other investment costs will usually apply either way, so scrutinise fee structures<\/a> before you pick your platform. Even trivial charges add up over time. Find what\u2019s best for you.<\/p>\n Assuming you\u2019re not getting badly stung some other way \u2013 be particularly wary of annual percentage-based charges on large investment pots \u2013 then paying no trading fees is a nice benefit, especially when you\u2019re starting out.<\/p>\n Have a look at the Monevator<\/em> broker comparison table<\/a> to compare charges.<\/p>\n Continuing our example, we click along to the final confirmation screen.<\/p>\n Pressing \u2018Place a deal now\u2019 will do the deed and commit your cash:<\/p>\n Then it\u2019s just a matter of sitting back and waiting for our order to be fulfilled. The buying bit on our side is done.<\/p>\n As with our ETF purchase in the previous article, we\u2019ll have to wait a while for the trade to settle, but in practice you\u2019ve committed your investment into the fund.<\/p>\n Your broker should supply you with a contract note for your records.<\/p>\n Buying and selling index funds can feel easier than trading ETFs, if only because there\u2019s not the pressure of a countdown and you don\u2019t need to worry about spreads.<\/p>\n True, you do have to wait to know the exact price you paid with index funds, unlike ETFs.<\/p>\n But for long-term passive investors putting money into broad index funds, that\u2019s no big disadvantage.<\/p>\n Price fluctuations on a day-to-day basis are essentially random. We\u2019re growing our investments for decades<\/a>.<\/p>\n Inspired? If you\u2019re after ideas about what index tracker funds to buy then check out The Accumulator\u2019s overview of low-cost index trackers<\/a>. Note that comments below might refer to an older version of this article.<\/em><\/p>\nWhat is an index tracker fund?<\/h3>\n
Pricing<\/h3>\n
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I\u2019ll trade yer\u2026<\/h3>\n
Deal with it<\/h4>\n
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<\/a><\/p>\n![\"\"](\"https:\/\/i0.wp.com\/monevator.com\/wp-content\/uploads\/2018\/11\/buying-a-fund-fidelity-2.jpg?resize=1024%2C651&ssl=1\")
<\/a><\/p>\nWho pays for all the underlying buying and selling?<\/h4>\n
What will the trade cost you?<\/h4>\n
Doing the deed<\/h4>\n
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<\/a><\/p>\nThat\u2019s all folks<\/h3>\n