Why you should avoid buying funds after lunch

So if you place your order this afternoon, nothing will happen until midday tomorrow. And a lot can happen to share prices in a day’s trading, especially when events on Wall Street are so important to markets around the world.

Let’s imagine that you place an order for a UK “tracker” fund at 2pm one day. It’s perfectly possible that the London market will itself move quite substantially between then and the close of trading at 4.30pm. But if the American market then opens and something drives it much higher – better economic news or monetary stimulus, for example – there is every chance that the FTSE 100 will follow suit when it opens the following morning.

Assuming that those gains don’t disappear during the morning, the index will still be higher when the buy order you placed the previous day is executed at noon – and the price you pay will be higher than you thought it would be.

If you instead place an order at 11am, there is only an hour for the market to experience an upset – and no overnight period when Wall Street could go shooting up.

Of course, events could also go in your favour; Wall Street could fall and drag London lower, meaning you pay less for your investment. But this is purely a gamble, and most investors would prefer to know the price they will pay.

Although most funds are priced at noon, there are exceptions.

“Offshore funds sometimes price at 3pm or 5pm and Standard Life Investments prices its funds at 7.30am for some reason,” said Darius McDermott of Chelsea Financial Services, the fund shop.

Under the rules, all funds available to retail investors need to be priced daily. This applies even to funds whose assets cannot themselves be priced every day, such as “bricks and mortar” property funds. Such funds will have their assets valued much less frequently, but the price of the fund unit is still set daily.

Other factors that could make you pay more for funds

There are several additional quirks of fund pricing that could mean you pay slightly more than you expected.

For example, unit trust managers incur less cost when the “buy” orders on a particular day roughly match the “sell” orders. This allows them to transfer units from the old investors to the new ones without buying or selling any actual shares, which would incur dealing commission.

But if there are far more buyers than sellers this won’t work and, once all the sold units have been allocated to buyers, there will still be excess demand from other buyers. The fund company then has to “create” more units by buying more of the underlying shares – which will attract dealing fees.

There are two ways in which the manager can pass on these extra costs to investors. It can charge the dealing commission to the fund as a whole, which means that the total annual charge is marginally increased for all investors. Alternatively, it can charge the extra cost to the new investors who gave rise to it, which some argue is a fairer system.

For unit trusts, this will be done via a “bid-offer” spread, which is the difference between the prices quoted to sellers and buyers. For Oeics, which have the same buying and selling prices, the manager would apply a “dilution levy” or “dilution adjustment”, which has the same effect.

The bid-offer spread can vary slightly depending on the type of asset involved, Mr McDermott said. “For example, the spread may be wider on a smaller companies fund, which has more illiquid holdings and higher dealing costs.”

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