A dilution levy is a way to share a fund's trading costs with the investors who create those costs. It helps protect most investors from paying for trading costs caused by a few.

 

Without a dilution levy, the fund pays all the trading costs. This means existing investors cover costs they did not cause.

 

The dilution levy is not paid to an outside company. It goes back into the fund for the benefit of all investors.

 

For example, if you invest £10,000 and your trade creates £20 in trading costs, the dilution levy can be applied so you invest £9,980. The extra £20 is paid into the fund to cover the trading costs your investment created.

 

Not all funds use dilution levies. Some funds do not adjust for these costs, sharing them among everyone because trading costs are usually similar for all investors.

 

The amount of dilution levy depends on the assets in the fund. It is usually higher for funds investing in assets that are harder or more expensive to trade, like smaller companies or property.

 

If a fund applies a dilution levy, it is usually between 0% and 2% of the transaction amount.

 

Some funds use another method called a "bid/offer spread" to manage trading costs.