Unit Trusts and OEICS

What are Unit Trusts / OEICs?

Unit trusts and open ended investment companies (OEICs) are collective investments, which allow individual investors to pool their money into a fund which is then invested in a wide range of shares or fixed interest stocks.

The number of companies and securities invested in should be greater than an average investor could achieve cost effectively through a portfolio invested directly in stocks and shares. The fund is then professionally managed to achieve maximum returns consistent with the stated investment objectives of the fund.

Collective investments can provide clients with expert management and an opportunity to reduce risk through diversification. They offer suitable investment opportunities for most investors by allowing access to an extensive range of funds all with different aims and objectives.

Unit Trusts

A unit trust is a fund of stock market investments divided into equal portions called units. The price of units is calculated regularly, normally on a daily basis and is governed by the value of the underlying stocks and shares in the fund. This price will rise and fall with movements in the price of those stocks and shares. There will usually be two prices quoted for such units, an offer price and a bid price. The offer price is higher than the bid price, normally by 6-7% and is the price the investor pays to buy the units. The lower price, the bid price, is the price that an investor would receive when selling the units. This difference represents the charge made by the fund manager and the costs incurred in buying and selling shares within the fund.

Open Ended Investment Companies (OEICs)

OEICs are a new form of pooled investment introduced into the UK in the first half of 1996. They were largely introduced as a more flexible and simplified alternative to the established vehicle of unit trusts and unlike unit trusts, they can be marketed anywhere within the European Union. They are in fact very similar to unit trusts and are managed in the same way. However, instead of buying units, the investor buys shares in the OEIC and the value of these shares is directly linked to the value of all the assets in the fund. Instead of a bid-offer price structure the shares are quoted on the stock market at a single price to which buying or selling costs are added.