INVESTMENTS EXPLAINED – UNIT TRUSTS AND OEICS

Investments explained _ Unit Trusts and OEICS Unit trusts and Open-ended Investment Companies (OEICs) each operate in a very similar way, which is why they are often grouped together. OEICs are also sometimes called Investment Companies with Variable Capital (ICVCs).

How do Unit Trusts and OEICs work?

They are funds that trade in shares, fixed interest securities, bonds and property on behalf of their investors. When you invest, you get access to a wider spread of investments than you’d potentially have access to on your own. Pooling your money with others also reduces the risk involved.

When the portfolio value rises, the unit/ share price increases and, conversely, when the portfolio value goes down, the unit/share price will fall. The price that unit trusts are bought and sold at is reflected in what’s referred to as the bid/offer spread. The higher price quoted is the price you buy at, the lower is the price you will get if units are sold back to the fund managers. By contrast, an OEIC has a company structure and issues shares instead of units, and you will see a single price quoted rather than the bid/offer spread, with a separate charge instead.

Managing your money

They are managed by a fund manager or investment team. It’s their job is to decide on a daily basis where the money should best be invested to maximise gains. The assets could be held in company shares (equities), corporate or government bonds, property or cash.

Investment choices

At one end of the scale, there are many broadly-based unit trusts and OEICs that aim to get a good return from investing across the main asset classes, at the other, there are those designed for the more adventurous investor who is happy to assume a high degree of risk and wants, say, to put their money into individual emerging markets such as Brazil or India, or invest in shares that the managers believe to be temporarily undervalued. Whilst there are prospective gains to be made in these funds, they do carry higher risk and a greater likelihood of capital loss. Most new investors are advised to opt for a more broad-based approach.

Advantages for investors

  • They can be held tax-efficiently within an Individual Savings Account
  • There is a wide variety of funds available, providing easy access to specialist sectors and overseas markets
  • Experts make the choice of investments on behalf of investors and the portfolio is regularly reviewed
  • Managers can invest in a wide range of companies, spreading and reducing the investment risk for investors
  • Units are simple to buy or sell and modest lump-sum or regular investments are possible.

The value of the investment can go down as well as up and you may not get back as much as you put in. Tax treatment varies according to individual circumstances and is subject to change.

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