The Ongoing Charges Figure gets most of the attention when investors compare fund costs, but it isn't the whole story. Every time a fund buys or sells one of its underlying holdings, it incurs its own dealing costs — and in the UK, buying certain shares also triggers Stamp Duty Reserve Tax. None of this appears inside the OCF, yet it's a real cost ultimately borne by everyone invested in the fund.
What sits outside the OCF
As explained in the companion articles on the OCF and on OCF versus TER versus AMC, the OCF captures a fund's ongoing management and administration costs but explicitly excludes the cost of the fund itself trading its underlying portfolio. These "portfolio transaction costs" are disclosed separately, usually in a fund's more detailed cost disclosure documents (such as a fund's costs and charges disclosure under UK regulatory requirements) rather than in the headline factsheet.
What portfolio transaction costs include
Broker commission and dealing spreads
When a fund manager buys or sells shares, bonds, or other securities on behalf of the fund, the fund pays broker commission and is exposed to the "bid-offer spread" — the small gap between the price at which a security can be bought and the (usually slightly lower) price at which it can be sold at any given moment.
Stamp Duty Reserve Tax
Purchases of UK shares (though generally not most UK government bonds, and not purchases of units in most funds themselves) incur Stamp Duty Reserve Tax at 0.5% of the transaction value. A UK equity fund that trades its portfolio relatively frequently will incur this charge repeatedly across the year, adding a real, if often modest, drag that sits entirely outside the OCF.
Foreign transaction taxes
Some other countries levy their own equivalent of stamp duty on share purchases (for example, on French or Irish shares), which a globally diversified fund may incur when trading in those markets.
Why transaction costs vary so much between funds
The single biggest driver of transaction costs is portfolio turnover — how frequently a fund buys and sells its underlying holdings over the course of a year.
| Fund type | Typical portfolio turnover (illustrative) | Typical transaction cost impact |
|---|---|---|
| Passive index tracker (low turnover, only trades on index rebalancing) | Low, often under 10% a year | Very low, often a small fraction of a percent |
| "Buy and hold" style active fund | Low to moderate | Low to modest |
| Actively managed fund with frequent trading | High, sometimes 50–100%+ a year | More noticeable, though still usually well under 1% |
These figures are illustrative and vary considerably by individual fund and strategy; investors should check a specific fund's own disclosed transaction cost figures rather than relying on general ranges.
A worked hypothetical example
Suppose two hypothetical UK equity funds each hold £200 million in assets. Fund X has low portfolio turnover of 15% a year, while Fund Y has higher turnover of 80% a year, both trading UK-listed shares subject to 0.5% Stamp Duty Reserve Tax on purchases (roughly half of total turnover, since turnover includes both buys and sells):
| Fund | Annual turnover | Approx. value of shares purchased | Stamp duty on purchases (0.5%) | As % of fund assets |
|---|---|---|---|---|
| Fund X | 15% | £15m (half of £30m turnover) | £75,000 | 0.04% |
| Fund Y | 80% | £80m (half of £160m turnover) | £400,000 | 0.20% |
In this simplified hypothetical illustration, the higher-turnover fund incurs roughly 0.16 percentage points more in stamp duty alone than the lower-turnover fund, purely due to trading frequency — before accounting for broker commission and dealing spreads on top, and without this appearing anywhere in either fund's headline OCF.
Where to find a fund's actual transaction cost figures
- Look for a fund's "costs and charges" or "MiFID costs disclosure" document, often available on the fund provider's website alongside the standard factsheet.
- Some platforms display a combined "reduction in yield" figure that attempts to fold in transaction costs alongside the OCF and platform charge — useful where available, though not universally offered.
- Where explicit transaction cost figures aren't easily available, portfolio turnover (sometimes disclosed in a fund's annual report) can serve as a rough proxy — higher turnover generally implies higher transaction costs, all else being equal.
Stamp duty and the individual investor: a common point of confusion
It's worth being clear about the difference between stamp duty incurred inside a fund (when the fund itself buys underlying shares) and stamp duty an individual investor might separately encounter. UK investors typically do not pay Stamp Duty Reserve Tax when they buy units in a fund itself, or when they buy shares in most ETFs, since these are typically structured in a way that falls outside the standard 0.5% charge that applies to direct UK share purchases (a notable historical exception has applied to some UK-domiciled ETF structures, and rules in this area can change, so it's worth checking current guidance rather than assuming). What this article is describing is a different, less visible layer: the stamp duty a fund itself pays when its manager buys UK shares on the fund's behalf as part of running the portfolio, which is a cost borne collectively by everyone invested in the fund, reflected in its performance rather than charged to the individual investor directly.
Anti-dilution mechanisms: swing pricing and dilution levies
Some funds use mechanisms specifically designed to pass portfolio transaction costs on to the investors actually causing them, rather than spreading them across all investors in the fund equally. A "dilution levy" or "swing pricing" adjustment applies a small extra charge (or price adjustment) specifically when an investor buys or sells during a period of significant net inflows or outflows to the fund, reflecting the extra trading costs the fund incurs to accommodate that activity. This is a fairness mechanism more than a headline cost investors should expect to encounter often, but it's part of the broader landscape of costs that sit outside the OCF and are worth being aware of, particularly for anyone investing or withdrawing a large sum in a single transaction.
How significant are transaction costs in practice?
For most low-turnover passive tracker funds, transaction costs are typically a very small addition on top of the OCF — often a hundredth of a percent or a little more. For higher-turnover actively managed funds, they can be more meaningful, sometimes adding a few tenths of a percentage point, though rarely rivalling the OCF itself in size. They're worth being aware of primarily so that investors comparing a low-turnover tracker against a high-turnover active fund understand that the true cost gap between the two is somewhat larger than comparing OCFs alone would suggest.
Why regulators have pushed for more transaction cost transparency
Following EU-derived rules that came into UK regulation (broadly known by the shorthand MiFID II), fund providers became subject to more detailed requirements to disclose transaction costs to investors, beyond what the OCF alone had previously captured. This was, in part, a response to a recognition that the OCF, despite being a genuinely useful standardised figure, did not tell the whole cost story, and that investors comparing high-turnover and low-turnover funds purely on OCF could be misled about the true cost gap between them. In practice, take-up and prominence of this more detailed disclosure has varied across providers and platforms, and it remains less universally accessible and less consistently presented than the OCF itself, which is one reason many investors and even some professional commentators continue to lean primarily on the OCF as the headline comparison figure, while treating transaction cost disclosures as a secondary, supplementary check for funds where turnover is notably high.
How to factor transaction costs into a broader portfolio review
For an investor conducting a periodic portfolio review, a reasonable approach is to check the disclosed transaction cost figure (where readily available) for any fund with a notably higher OCF or a known active, higher-turnover strategy, while not feeling obliged to chase down this figure for every low-cost tracker fund held, where the number is likely to be immaterial in any case. This keeps the review proportionate — spending time investigating the costs most likely to matter, rather than treating every fund with equal scrutiny regardless of its likely cost profile.
A practical takeaway for comparing similar funds
For most everyday comparisons — for example, choosing between two broadly similar low-turnover tracker funds — transaction costs are unlikely to be the deciding factor, since both funds will typically incur only modest trading costs in the normal course of tracking their index. Where the comparison becomes more relevant is when weighing a low-turnover passive approach against a genuinely high-turnover active strategy, where the additional layer of transaction costs, stacked on top of an already higher OCF, can meaningfully widen the true cost gap between the two options beyond what comparing OCFs in isolation would suggest.
Key takeaways
- Portfolio transaction costs — dealing spreads, broker commission, and stamp duty — sit outside the OCF and are disclosed separately, not folded into the headline fee figure.
- UK share purchases incur 0.5% Stamp Duty Reserve Tax, a real cost for funds that trade UK equities, repeated with every purchase.
- Portfolio turnover is the key driver of transaction costs — low-turnover tracker funds typically incur far less than high-turnover actively managed funds.
- These costs are usually modest in absolute terms but widen the true cost gap between low-turnover and high-turnover funds beyond what the OCF alone suggests.
- Checking a fund's specific costs and charges disclosure, or its portfolio turnover as a rough proxy, gives a fuller picture than the OCF in isolation.