What are OEIC's

An OEIC, an open ended investment company, is an umbrella fund containing qualifying investments that can normally comprise of shares, unit trusts or bonds.

OEICs are the same as unit trusts in their aims as they are both open ended but an OEIC fund is actually run as a company. You are free to add and quit, flexibly retaining opportunity to pick from the wide choice of funds that are available. You can also switch free of charge from fund to fund in most OEICs.

How do OEICs differ from unit trusts ?

Investors buy shares in the OEIC, similar to the units in a unit trust. However, in legal terms, unit trusts are complex and entitle an investor to participate in the assets of the trust without actually owning those assets whereas investors in an OEIC buy shares in that investment company, similar to buying shares in any other company. The fund's assets are protected by an independent trustee (for unit trusts) or an independent depository (for OEICs).

How are OEIC funds priced ?

Unlike unit trusts which quote two prices (one for buying, one for selling), OEIC shares are quoted at a single price, the NAV, net asset value price. This price is used to quote buyers and sellers on any given day. The net asset value is calculated by adding up all the the mid value of the fund's underlying investments and consequently as the Oeic funds constituent shares change, so does the NAV change daily.

Oeic's and ISA Accounts

You can hold oeic's and unit trusts in a stocks & shares ISA, subject to ISA rules for qualifying share investments. You will be able to buy and sell oeics and unit trusts within your online account as you will be able to buy any other shares or funds that qualify.

How will I know if Oeic funds qualify for ISA ?

Within the account you will be able to see whether a share or fund can be added to your isa. If the share does not qualify you will be unable to add the share to account.

ISAs act like a wrapper allowing you to invest or save a certain amount without having to share the proceeds with the taxman; there is no capital gains or income tax to be paid on returns - one of the few breaks for taxpayers. The investment options within each type of ISA are stocks and shares, cash and insurance.

An Introduction to Oeic's & unit trusts

Over the last twenty years Unit Trusts have become an increasingly popular way of investing capital and today there are many hundreds of unit trust and Oeic funds investing in Stock Markets around the world.

Unit trusts are often described as "collective" or "packaged" investments and this means that investors have a financial stake in an investment fund, which may invest in a wide range of securities, including stocks and shares.

This allows even a small investor to participate in a large portfolio of shares with many other investors, through the holding of units in a fund. The number of units held depends on how much capital is invested and the price at the time units are bought. Because most unit trusts are invested in stocks and shares, as you might imagine the price of the unit trust will go up and down in line with what is happening to the underlying investments.

Types of Oeic & unit trust

Each trust has specific objectives and because of this there are over twenty different unit trust categories.These cover UK funds, overseas funds and specialist funds. UK funds include Growth, Income, Smaller Companies, Gilts and Corporate Bonds. The objectives of the Growth and Income funds is obvious, the Gilt and Corporate Bond funds invest in fixed interest securities, whilst the Smaller Companies funds invest most of the assets in, as you might imagine, smaller companies.

There are a large number of International funds, which allow investors to either have a broad international spread of investment or to invest in countries or regions including North America, Europe, Japan and the Far East. Specialist funds include Technology funds and Commodity and Energy funds.

Who should consider a unit trust or Oeic

Unit trusts are attractive to a large number of people for different reasons, these include:

  • Investors who have only a small amount of capital and are unhappy investing in just one or two shares. Unit trusts will give them an investment in a large portfolio of shares.

  • Individuals who recognize the potential of equity investment but would prefer to have professional management rather than making day to day investment decisions themselves.

  • Those with existing share portfolios who perhaps enjoy investing in shares but feel more comfortable having part of their portfolio professionally managed.

  • UK investors wishing to invest capital in overseas markets.

Oeic Charges

There are usually two charges on a unit trust, the initial charge, typically up to 6% and an annual management charge of typically 1% to 1.5%. Units trusts have two prices, an Offer price and a Bid price. Units are bought at the higher Offer price and sold at the lower Bid price, the difference between the two prices is known as the spread and includes the initial charge.

Oeics are normally quoted only as a mid-price but an initial charge and an annual management charge of typically 1% to 1.5% still applies. Many fund supermarkets offer discounts on the initial charge as an incentive to pick the fund.

Oeic Taxation

Capital Gains tax may be payable on any profits made when the unit trust is sold. Dividends are subject to income tax in the same way as dividends from equities. The actual tax position will depend on your individual circumstances.

Oeic Risk

Like all stockmarket investments, there are risks and shares as well as funds and Oeics, can go down as well as up. Risk and reward are linked. In general terms, the higher the potential, the higher the risk. If investment in a building society deposit account can be described as low risk, then investments in unit trusts can range form low to medium risk in the case of most Gilt funds, to medium risk for most UK Growth and Income Funds, through to high risk for the Specialist funds.

Most fund managers advise clients that investment in shares, Oeics and unit trusts should be regarded as medium to long term investments. As a general rule advising that any such investment should be for five years minimum.


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