When it comes to investing, the devil is often in the details. While many UK investors focus on performance, diversification, and market trends, they often overlook one of the most significant long-term drags on portfolio growth: expense ratios. These seemingly minor fees, usually expressed in basis points, can quietly erode returns over time, especially when compounded across years or decades.

Understanding Basis Points and Expense Ratios

So, 100 basis points equals 1%. Financial professionals use basis points to express changes in fees, interest rates, or fund expenses with clarity and precision.

Expense ratios represent the annual cost of managing a fund, expressed as a percentage of assets under management. This fee covers administrative costs, fund manager compensation, research, and marketing. If a fund has a 0.75% expense ratio, it takes £7.50 out of every £1,000 invested per year. These fees are deducted from the fund’s assets, so you won’t see a direct bill, but they quietly reduce your investment returns.

The Math Behind Expense Ratios: Why Small Numbers Add Up

 But over time, that small gap can have an outsized effect on returns.

Consider two investors who each place £100,000 in separate funds that grow at a gross annual rate of 7% for 20 years. One fund charges a 0.20% expense ratio, and the other charges 1.00%.

• The low-cost fund grows to approximately £372,000.
• The high-cost fund ends up with around £320,000.

That’s a £52,000 difference, all due to an 80 basis point variation in fees. Over the decades, the power of compounding turns small percentages into significant financial consequences.

And unlike market volatility, which you can’t control, expense ratios are a drag you can choose to avoid.

The UK Context: Where Expense Ratios Hit Hardest

UK investors contributing to personal pensions or Self-Invested Personal Pensions (SIPPs) are especially vulnerable to high fees. Because these are long-term investments, even a minor difference in basis points can snowball into a five- or six-figure impact by retirement. The good news? The rise of low-cost index funds within UK pension schemes is giving investors more efficient options than ever before.

Investment Platforms and Wealth Managers

Another layer of cost comes from investment platforms. Most UK investors access funds through platforms like Hargreaves Lansdown, AJ Bell, or Interactive Investor. These platforms charge fees on top of the fund’s expense ratio, usually a percentage of your portfolio or a flat annual fee.

Add in wealth management or advisory fees, and the total cost of ownership can easily exceed 1.5%, or 150 basis points. At that level, fees consume a significant share of your returns every year.

ETFs vs. Mutual Funds in the UK

Exchange-Traded Funds (ETFs) have grown in popularity across the UK, largely because of their low expense ratios. Many passive ETFs that track major indices, like the FTSE 100 or global all-cap indexes, have fees as low as 0.07% (7 basis points). In contrast, actively managed mutual funds often charge between 0.75% and 1.5%, despite frequently underperforming the market.

The takeaway? UK investors can often access similar exposure for a fraction of the cost.

Strategies to Minimise Expense Ratios

One of the most effective ways to control costs is by choosing index-tracking ETFs or passive mutual funds. In the UK, providers like Vanguard, iShares, and HSBC offer funds with extremely competitive expense ratios, often under 0.15%.

If a low-cost index fund can deliver market-like returns at a fraction of the cost, it often makes more sense than paying extra for the hope of outperformance.

Evaluate the Total Cost of Ownership

Don’t stop at the fund’s expense ratio. Always consider the platform fee, any advisory charges, and trading costs. Some brokers offer capped fees or discounts for larger portfolios. It’s worth shopping around.

Using clean-fee share classes (funds that strip out commissions and rebates) can also reduce the hidden costs associated with fund distribution.

Leverage Online Tools and Resources

To help UK investors compare fund fees transparently, platforms like Morningstar UK, Trustnet, and even the FCA’s fee disclosures offer tools to analyse total costs. Make sure to check the Ongoing Charges Figure (OCF), which is a more comprehensive measure than the older TER (Total Expense Ratio).

For a deeper understanding of why small differences in expense ratios can matter so much, click here now to read Saxo’s comprehensive guide.

Conclusion

Expense ratios, often overlooked and misunderstood, have a powerful long-term impact on investment outcomes. While market volatility is unpredictable, fees are a known quantity, and one you can control. By recognising the true cost of a few basis points and making informed decisions, UK investors can protect and even enhance their long-term returns.

Don’t underestimate the impact of what seems like a small fee. In the world of investing, basis points matter more than you think.