### Author Topic: Cumulative Interest (and index funds charges) Question  (Read 1453 times)

#### kript

• Posts: 4
##### Cumulative Interest (and index funds charges) Question
« on: April 22, 2015, 03:13:30 PM »
So I'm about to start index fund investing. I'm in the UK, and thinking of following the Excellent Movevator's thought experiment of a split between HSBC FTSE All-Share and HSBC UK Gilt index funds (http://monevator.com/how-to-invest-on-a-budget/).

However, the HSBC funds have ongoing charges of 0.17% and 0.18% respectively compared with, Vanguard's Lifestrategy 80 which has an entry charge of .10%, but charges of 0.24%.

It seems to me that the combined cost for the HSBC is 0.35 vs the Vanguard's 0.24. Is this correct, or have I missed something?

Also, I'm finding it hard to calculate the impact of the entry charge compared to the HSBC; I plan to invest a small sum (say £100), monthly, for pound cost averaging, but am having trouble calculating the impact, especially when you take in account compounding. I can find the formula's for compound interest, but am unsure how to go about calculating the impact of the dilution.

Can anyone suggest a way to go about working this out, or point out any fallacies in my understanding?

#### skyrefuge

• Handlebar Stache
• Posts: 1015
• Location: Suburban Chicago, IL
##### Re: Cumulative Interest (and index funds charges) Question
« Reply #1 on: April 22, 2015, 04:16:34 PM »
The listed charges (AMC/TERs) apply to the amount of money you have invested in the fund that lists that charge, so you calculate a weighted average, not a sum.

If you had an 80%/20% split between the two HSBC funds, you would calculate the weighted TER as (80% * 0.17%)+(20% * 0.18%) = 0.172% (so, not 0.17% + 0.18% = 0.35%)

For Vanguard's 0.10% "preset dilution levy", here is how they describe it:

"Our preset dilution levy is collected purely to offset these transaction costs. This is not an ‘initial charge’ because all monies are returned to the fund for the benefit of the fund’s investors. Vanguard does not benefit from this charge in any way."

So I'm less sure how to factor that in. Its effect is to lower the TER of the fund from what it would otherwise be, though since it's a one-time charge and not an ongoing expense like the TER, it doesn't mean the TER would be 0.10% higher without it, it would be somewhere in between. As a very rough estimate, I'd say you could imagine the Vanguard fund then has an effective TER of something higher than 0.24% but lower than 0.34%, so, I dunno, 0.29%?

Whatever it is, it seems like it's more expensive than your HSBC option, so if HSBC can provide the allocation you want at a lower cost, I'd go with them.
« Last Edit: April 22, 2015, 04:19:21 PM by skyrefuge »