I would like to invest in a unit trust which has 5% initial charges. The bid price today was £1.218 and the offer one £1.282
My question is if I invested today £1000 and sold my investment tomorrow, what would I get back (assuming the price does not move)?
Method 1 The initial charge is taken away, so there is only 1000*(1-0.05)•0 to invest. This is used to buy 950/1.282t1.03units. Tomorrow I receive 741.03*1.2182.57 So I was charged around 10% in total.
Method 2 The whole £1000 is used to buy 1000/1.282x0.03units. Tomorrow I receive 780.03*1.218•0.08 So I was charged 5% in total.
I called the provider of the fund to ask about the charges. They told me that there were only an initial and an annual charge. When I enquired, however, about the effect of the different bid and offer price, I was eventually told that "Method 1" would be used. (I was told this however after the woman I was talking to consulted a colleague twice, which does not inspire me confidence that they really knew what is the actual method that is used).
The brochure of the fund states that if I invest 1000 and the fund grows by 6%, then at the end of the year I would receive 990. My calculations (using method 2 confirm this)
1000*1.0660 (amount at the end of the year before charges)
1060*1.5%.9 (annual charge)
1060*0.19%=2.01 (other charges) (1060-15.9-2.01)*(1-0.05)˜9.99 (amound received if investment is sold at the end of the year)
Is it possible that the brochure has not included all the charges in the above calculation?
The Fidelity "funds supermarket" offers the above fund with an initial charge of only 1.5%. Does this mean that if I had bought today I would have paid an offer price of 1.237 (instead of 1.282 and given the bid price of 1.218)?
And a last question. If I buy this fund outside an ISA will I have to pay any tax myself, given that I am a basic tax rate payer? (I know that there will be some tax deducted at source). Would that be different if I was a higher tax rate payer?