Unit Trusts and OEICs Explained

Unit Trusts

Unit trusts enable investors to invest in a broad range of stocks, shares and other assets. They are “collective” investment funds, which allow investors to pool their money with other investors to form a fund that is managed by a professional fund manager. Each fund is governed by a trust deed, which establishes how it is run and its investment objectives.

Investors purchase units, which can be easily bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets; prices are published daily in the press. The price at which individuals can purchase units is called the offer price, which is higher than the selling, or bid price.

In addition to offering the potential for capital growth, income from the assets owned by a unit trust is distributed regularly to unit holders. Alternatively income may be re-invested to supplement capital growth. Income, whether distributed or re-invested is liable to Income Tax.

Open Ended Investment Companies (OEICs)

OEICs became available in the 1990s and many long established unit trusts have converted their status to an OEIC over recent years.

An OEIC is a company set up specifically for the purpose of carrying out investment on behalf of its shareholders. It enables investors to invest in a broad range of stocks, shares and other assets. They are “collective” investments, which allow investors to pool their money with other investors to form a fund that is managed by a professional fund manager.

Investors purchase shares, which can be easily bought and sold from the OEIC manager. The price of shares is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets; prices are published daily in the press. Unlike unit trusts, there is only one share price, however an initial charge is levied when investing and ongoing annual management charges often apply.

In addition to offering the potential for capital growth, income from the assets owned by an OEIC is distributed regularly to shareholders. Alternatively income may be re-invested to supplement capital growth. Income, whether distributed or re-invested is liable to Income Tax.

Gains made on the sale of a Unit Trust or OEIC are subject to Capital Gains Tax (CGT), however these can be set against the annual CGT allowance, which is £9,600 per person for the 2008 - 2009 tax year.

Unit Trusts and OEICs offer a number of advantages to investors:

• They offer a simple way of benefiting from an investment in the stock market whilst avoiding the complications and many of the risks associated with a person buying and selling individual stocks and shares.
• The fund can invest in a broad spread of stocks and shares, which brings greater diversification and spread of risk.
• Each fund will benefit from the expertise of a professional fund manager who takes on the responsibility of the day to day investment decisions.
• There are many types of funds available, from low/medium risk funds such as fixed interest and corporate bond funds, through to specialist high risk funds investing in sectors such as smaller companies or specific countries.

As with any stocks and shares based investment it is recommended you take a minimum five-year view when considering Unit Trusts or OEIC investing.