# Direct share purchase V mutual/unit funds



## chicote (20 Apr 2007)

Hi, this web site advises that instead of purchasing units in a unit or mutual fund that it is cheaper and better all round to buy shares directly. My question is that you can invest say, 500e pm in a unit fund, but are you not liable for stamp duty/broker fee's etc if you use your 500e every month to directly purchase shares?? how can you purchase shares on monthly basis without these costs?


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## ClubMan (21 Apr 2007)

chicote said:


> if you use your 500e every month to directly purchase shares?? how can you purchase shares on monthly basis without these costs?


You can't. Stamp duty is a non negotiable tax and brokers will not work for nothing.


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## chicote (21 Apr 2007)

thanks for the reply Clubman. I take from this that unit funds are obviously the cheaper option for the monthly investor. So much for the recommendation in the Savings and Investment guide to invest directly, maybe this should be amended to reflect lump sum investments and not monthly savings.


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## Del3D (21 Apr 2007)

chicote said:


> thanks for the reply Clubman. I take from this that unit funds are obviously the cheaper option for the monthly investor. So much for the recommendation in the Savings and Investment guide to invest directly, maybe this should be amended to reflect lump sum investments and not monthly savings.



Possibly not, depending on the broker that you choose. 

On-line brokers charge as little as $1 to $10 for the purchase of shares. I am a regular investor, investing directly in shares and ETFs. The advantage of holding shares and ETFs directly is the annual reduction in management fees. 

e.g. 
Shares - typically no annual fees, once purchase has taken place (Remember also that only Irish (1%) and U.K. (0.5%) shares involve stamp duty, and the main ones have ADRs in the U.S. with no stamp duty - typical rip-off Ireland!)

ETFs - low annual fees, typically 0.1% to 0.5% of the total invested p.a.

whereas 
Funds - annual fees of 1% to 2% of the total invested p.a. and may also involve transaction fees - e.g. Rabodirect is 1.5% (purchase + sale)

On a regular investment of €500 p.m in unit funds @ 1.5% will cost you €45 in year 1 (average on year €3000), €135 in year 2 (€9000), €225 in year 3 (€15000), €315 in year 4 (€21000) and so on up - and this is assuming no annual growth in the fund! 

With shares you could buy every second month at $10 per transaction for a purchase of €1000 worth of stock. This would cost you $60 in year 1, $60 in year 2, $60 in year3... and the great thing is that if you stop your regular contribution, you will typically have no comission to pay annually...

Yes, you do have to sort out all the tax issues yourself - but you have to do the same if you take out Rabodirect funds!


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## chicote (22 Apr 2007)

Excellent advise Del3D, much obliged, can you recommend a good online broker?


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## Del3D (22 Apr 2007)

There are many - search the forums:

www.keytrade.com (€10 per trade for ETFs, no account maintenance charges)
www.interactivebrokers.com ($1+ per trade, €10 per month minimum comission charges)

Are popular. I am with Interactive Brokers (you would have to put work into understanding every aspect of this one)


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## ClubMan (22 Apr 2007)

chicote said:


> thanks for the reply Clubman. I take from this that unit funds are obviously the cheaper option for the monthly investor. So much for the recommendation in the Savings and Investment guide to invest directly, maybe this should be amended to reflect lump sum investments and not monthly savings.


(a) As above it's not necessarily as simple as you make it sound and depends on many factors including the amount of time over which you remain invested in one or ther other (b) the guide is just a summary of useful tips and (c) the key posts thread covers a lot of this stuff in more detail (e.g. the pros and cons of the different ways of holding shares). Of course if you think that specific parts of the guide need to be rewritten or refined then feel free to do so yourself and send the updates to _Brendan _who I am sure will give them due consideration for inclusion.


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## chicote (23 Apr 2007)

Thanks clubman and Del3d for all the advice, much appreciated.


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## Sarsfield (23 Apr 2007)

What about tax on dividends when comparing direct v funds?

You pay income tax on dividends for the year for which you receive a dividend.  Is this the case even if you use the proceeds to purchase more shares?

If dividends are reinvested in a fund then no income tax and the effect of gross rollup work to the advantage of a fund?  No?

The average dividend yield of the DJIA components is 2.4% (the first dividend yield I could find at a moments notice!).  41% tax on a 2.4% dividend is a cost of 1% per annum on your investment.  A cost that doesn't apply to funds.

I've intrigued myself!  Am I correct or have I gotten something wrong?


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## ClubMan (23 Apr 2007)

Sarsfield said:


> You pay income tax on dividends for the year for which you receive a dividend.  Is this the case even if you use the proceeds to purchase more shares?


Yes.


> If dividends are reinvested in a fund then no income tax and the effect of gross rollup work to the advantage of a fund?  No?


No. It is irrelevant what is done with the dividend money. In particular if the money is reinvested (e.g. through a _DRIP _scheme) then the (nominal) income is still assessable for income tax.


> The average dividend yield of the DJIA components is 2.4% (the first dividend yield I could find at a moments notice!).  41% tax on a 2.4% dividend is a cost of 1% per annum on your investment.  A cost that doesn't apply to funds.
> 
> I've intrigued myself!  Am I correct or have I gotten something wrong?


Yes - you are completely wrong on this.


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## Sarsfield (23 Apr 2007)

ClubMan said:


> No. It is irrelevant what is done with the dividend money. In particular if the money is reinvested (e.g. through a _DRIP _scheme) then the (nominal) income is still assessable for income tax.


 
Huh? This is the first time I've heard mention of income tax in relation to fund investing.

While everything you've said in your post above may be correct, I'm afraid having read it I'm none the wiser


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## ClubMan (24 Apr 2007)

I assumed that you were talking about dividends paid on shares held directly which are then reinvested in more shares. In this case the dividends are still assessable for income tax.

If you are talking about dividends paid on shares held by a unit linked fund and then reinvested then I believe that tax may still apply and if it does then it is dealt with within the fund and reflected in the overall management charges and/or reduction in yield.


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## Sarsfield (24 Apr 2007)

ClubMan said:


> I assumed that you were talking about dividends paid on shares held directly which are then reinvested in more shares. In this case the dividends are still assessable for income tax.


 
OK. I could have been clearer there! Fair enough.



> ...tax may still apply and if it does...


 
It's the ifs & maybes that decide which is the better investment option!

*Maybe* tax is witheld at 20% so the fund only gets 80% of the dividend (like direct shareholders receive I believe).

But I don't think any other income taxes apply to funds.  And I DO believe any dividend received by a fund also benefits from gross rollup.

You also said I was completely wrong on the DJIA dividend yield bit.  Can you explain?


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## ClubMan (24 Apr 2007)

Completely wrong on the tax issue is what I meant (while assming that you were talking about reinvested dividends on direct shareholdings).


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## Sarsfield (24 Apr 2007)

ClubMan said:


> Completely wrong on the tax issue is what I meant (while assming that you were talking about reinvested dividends on direct shareholdings).


 
OK.



			
				me said:
			
		

> The average dividend yield of the DJIA components is 2.4% (the first dividend yield I could find at a moments notice!). 41% tax on a 2.4% dividend is a cost of 1% per annum on your investment. A cost that doesn't apply to funds.


 
I'm still happy to be told where this theory falls down! Honestly! I'm sure it must fall down somewhere!


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## ClubMan (24 Apr 2007)

I would be surprised if no tax applied to dividends paid on shares held by a unit linked fund. On the other hand I don't know what tax may apply in this case.

Update: according to _Brendan _here _UCITS _(not sure if he meant unit linked funds generally?) pay 20% tax on dividends which are then reinvested.


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## Sarsfield (24 Apr 2007)

ClubMan said:


> I would be surprised if no tax applied to dividends paid on shares held by a unit linked fund. On the other hand I don't know what tax may apply in this case.


 
But you'd agree it would be worth finding out for sure before choosing direct investment over funds?

I'm very pleased with my (surely faulty) little theory


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