A bid/offer spread is a small adjustment to the unit price when you buy into a fund. It means you pay a slightly higher price for new units. This covers some of the trading costs that the fund has when investing your money. The goal is to protect existing investors from these costs.

 

Without a bid/offer spread, the fund would pay these trading costs. This would mean current investors end up covering the costs for new investors.

 

For example, if you invest £10,000 and this creates £20 in trading costs, the unit price might be set 0.2% higher. You would receive £9,980 worth of units and the remaining £20 would go to cover the fund's costs.

 

Not all funds use bid/offer spreads. Some funds do not adjust prices, as overall trading costs are similar for everyone over time.

 

The size of the spread depends on the types of assets the fund buys. It is usually higher for funds that invest in assets that are harder and more expensive to trade, like small companies or property.

 

When funds use a bid/offer spread, it is usually between 0% and 2% of the unit price, but it can sometimes be more.

 

Some funds use a dilution levy instead, which is a different way to cover trading costs.