Guides: investments
Unit trusts and OEICs
Unit trusts and OEICs (Open Ended Investment Companies, commonly referred to as ‘oiks’), are investment funds, which provide an easy opportunity to access the world’s stock markets.
The funds are often called collectives, mutual funds or investment funds and provide a popular route for investment. To the average investor there is little difference between unit trusts and OEICs. Basically all funds have an investment objective and a manager who invests the money in accordance with the objective.
A unit trust is a fund set up under a trust deed, whereas an OEIC is an investment company with variable capital. As with unit trusts – where the fund assets are held by a trustee – so OEICs assets have to be held by a nominated depository.
The investor joins with other investors into the pooled fund. This allows the fund manager to invest in a wide variety of stocks and shares in the market, which reduces risk compared to investing in a single company share. The investor buys a share or unit in this collective investment. Each unit or share is the same for all investors in the fund, and is an equal share of the underlying investments.
Buying a unit trust or OEIC
An investor buys units in a fund, the price of which reflects the value of the underlying investments. Most fund prices are published daily on websites and financial newspapers and to calculate the value of an investment the number of units purchased is multiplied by the unit price. Some funds are single priced, in other words are bought and sold at the same quoted price. Others have two prices; the bid and the offer. Units are bought at the offer (higher) price and sold at the bid (lower) price.
Units in the funds can be bought directly from the investment house, a discount broker, an online fund supermarket or platform or through an Independent Financial Adviser (IFA).
The usual minimum amount for a single investment is around £500 but it is often possible to invest on a regular monthly basis where the minimum monthly sum required may be as little as £10, but on average is around £50 depending on the fund.
To help an investor find a suitable fund The Investment Management Association monitor the funds to ensure that managers are investing in the areas stated in the objectives.
It should be noted by investors that even funds within the same sector have different risk profiles and can be managed in a completely different way. We would recommend that anyone considering investing in a unit trust or OEIC should seek independent advice.
The sectors reflect the type of investment (asset class) the fund is invested in (bonds, cash, equities, property and so on); whether the fund is designed to provide income or growth; and/or the geographical region where the fund invests.
The type of fund chosen should reflect the attitude to risk of the investor, the time horizon and investment goals. For instance, is the investment required to provide an income or capital growth and will it be a long or short term investment.
Income and tax
Income (dividends) from unit trusts and OEICs are subject to personal income tax. Proceeds from sales of units and shares are subject to Capital Gains Tax in excess of the annual allowance at a flat rate tax of 18%. There are some exceptions to this, and advice should be sought prior to any transaction. The fund literature will often give the tax status of the fund.
Charges
Funds usually have an initial charge, which can vary enormously dependent on the type of investment and where the fund is purchased. In general you would expect an initial charge of anything up to 5.5%.
There is also an annual management charge, which tends to range from 0.5% to 1.75%. Lower charging funds tend to invest in cheaper assets such as government gilts, or the underlying shares are not actively managed by a fund manager but follow an index such as the FTSE 100. Index tracking tends to be an automated process and therefore lower cost.
When selecting a unit trust for investment it is important to be clear about what style of fund you are looking for as while charges are a consideration they should not be the prime driver.
We would suggest that suitability, dependent on the investor’s attitude to risk and probability of achieving better than average returns, should be the priority. Independent advisers will have access to tools and research that will help in the decision-making.
