Unit Trusts / OEICs
What is a unit trust?
A unit trust is a ‘collective investment’ that enables you to spread your investment risk by ‘pooling’ your money with a large number of investors. The unit trust investment manager makes the investment decisions. By investing for a large group, rather than an individual, the manager has sufficient assets to spread the investment risk.
Different unit trusts are available concentrating across a geographical area, a specialised sector of industry, or a specific type of stock. For example, you can choose a fund specialising in UK companies, or one that concentrates its investments in the Far East.
Each day the total assets of the fund are valued. The value is divided by the number of units issued and the unit price is set for that day. Before determining the value, the investment and administration charges are deducted.
Unit trusts are subject to Income Tax and Capital Gains Tax.
What are Open Ended Investment Companies (OEICs)?
Open Ended Investment Companies (OEICs) are very similar to unit trusts. They have the same tax treatment and are a ‘collective investment’ enabling individuals to ‘pool’ their money with a large number of other investors.
Many unit trust managers have changed their unit trusts into OEICs. This is to simplify the collective investment process, reduce charges and allow greater investment freedom.
The main difference between an OEIC and a unit trust is the charging structure. A unit trust has two prices known as the Offer Price (buying price) and the Bid Price (selling price). The difference between the two, on average 5%, is referred to as the Bid/Offer spread. In addition there is an annual management charge, which is usually in the range of 1% to 2%.
An OEIC has one price at which you buy and sell, with an initial charge taken as a percentage of the amount invested. When you purchase or sell a holding, the dealing costs are charged separately and detailed on your transaction statement. An OEIC also has a quoted annual management charge.
By investing in an OEIC you are buying shares in an Open Ended Investment Company rather than units as in a unit trust. An OEIC is the most widely recognised investment fund structure in Europe and allows flexibility in charging and currency structure that unit trusts do not offer.
An OEIC can offer different share classes, which gives investment managers the option to offer various charging structures and investment objectives through different share classes in one OEIC. In essence, an OEIC offers a more efficient, flexible and transparent investment vehicle for collective funds.
Investment risks
As with all investments linked to equities (and property and fixed interest securities), the value of your investments can go down as well as rise, and you may not get back the initial amount of your investment.
The selection of funds for investment is a difficult process. Current investment conditions and personal circumstances should be considered before investment. If you would like to consider advice from SBJ Benefit Consultants then please email david.brennan@sbjbc.co.uk or sebastian.fretten@sbjbc.co.uk.
If you do not want advice and want to invest online, please click here.