How to invest for free… and the hidden costs to watch out for that eat into your profits

Keeping costs as low as possible is key to investing. Overpaying by even a fraction of a percentage point can erode the value of your nest egg by thousands over time.

Say, for example, you had £25,000 invested and contributed £500 a month. If you paid fees of 1 per cent, with a return of 7 per cent, you would have £125,853 after ten years. But if you paid just 0.5 per cent a year in fees, you would have £130,422 – an extra £4,569.

The cost of investing has plummeted and some platforms even allow you to hold an account for free. But there are still other costs you need to keep an eye on.

Check your platform

New platforms such as Freetrade, InvestEngine and Trading 212 are designed to keep costs low. They don’t charge you to hold an account or to buy and sell. But they all charge in other ways. For example, foreign exchange (FX) fees can vary – this is how much it costs to convert your pounds when you buy international shares.

Trading 212 charges 0.15 per cent in FX fees, while Freetrade charges 0.99 per cent to customers with its free account.

You should beware of risky investments called contracts for differences (CFDs). These are complex and most investors lose money when trading them.

Some investors prefer more established platforms. Fees on several of these have fallen substantially in recent years.

For example, account fees at rival platforms Hargreaves Lansdown and Fidelity start at 0.35 per cent, and it costs £6.95 and £7.50 respectively to trade shares and exchange-traded funds (ETFs).

The key to finding the best deal is to understand how you invest. If you trade frequently, a platform that does not charge may be better for you. If you like to curate your portfolio, you may need a platform that offers a wide range of funds.

Keep fees in check

Even if you are not charged for holding an investment account, you will almost certainly face fees for the funds that you purchase.

You can check how much you’re paying by looking for the Ongoing Charges Figure (OCF). This should be on your platform website or by searching for the fund’s Key Investor Information Document. Funds run by expert managers can cost as much as 1 per cent a year or more. A cheaper alternative is passive funds and ETFs that track the performance of a market or sector, such as the FTSE 100.

These typically cost around 0.25 per cent or less. These funds will never beat the market – however, there is no guarantee that an expert fund manager will manage to, either.

Get a rebate on fees

Some investment platforms have negotiated lower fees on some funds. For example, Hargreaves Lansdown has agreed discounted OCFs on Legal & General, BlackRock and Jupiter funds. This can help bring down costs, but needs to be viewed within the context of all the other fees charged by a platform.

One platform, called Prosper, refunds the underlying fees on more than 30 funds. With no account fees or other platform charges, this makes it possible to invest for free. It offers funds that track the performance of major sectors and asset classes, so it’s possible to build a diversified portfolio at zero cost.

Set up a plan

If you prefer more established investment platforms, there are ways to lower your costs – even if you can’t invest for free.

One method is to set up a regular investing plan. AJ Bell, Barclays Direct Investing and Interactive Investor, for example, don’t charge for doing this.

Flat fee or percentage?

Some platforms charge a flat fee and others ask for a percentage of your investments. Paying the latter can be cost-effective for smaller portfolios, but as your pot grows so do your fees. Subscription charges mean you can keep costs under control and tend to be cheaper for larger portfolios.

Compare options to see which is best for you. For example, Interactive Investor charges flat fees of £5.99 a month for portfolios of up to £100,000 and £14.99 a month above that.