Units Trusts and OEICs, Open Ended Investment Companies

Who are Unit Trusts and OEICs for?
Millions of people hold investments in unit trusts and their close relations OEICs (open ended investment companies).

Many buy them through tax efficient savings plans such as Individual Savings Accounts (ISAs) or their predecessors Personal Equity Plans (PEPs). But unit trusts and OEICs can also be held directly outside an ISA or PEP wrapper.

Unit trusts and OEICs do not themselves offer any tax breaks, although if they are held within an ISA all capital gains and income are tax-free.

Unit trusts and OEICs are definitely worth considering if you are aiming to broaden the scope of your investment beyond relatively low risk products such as savings accounts.

Traditionally, unit trusts and OEICs have been one of the first choices for people looking to gain exposure to the stock market without the risks involved in directly buying stocks and shares.

Unit trusts and OEICs, like other collective investment funds, work by pooling your money with that of other investors. This can be useful, as you need up to invest in around 30 to 50 different shares to really spread your risk effectively. To hold that number of stocks directly requires a fairly large sum of money, if you are to avoid excessive dealing charges.

Unit trusts and OEICs - whats the difference?
Unit trusts are collective investment funds which allow investors access to a wide spread of shares, bonds, gilts or property. The funds are open-ended allowing units to be created when people invest and cancelled when individual investors cash in their investment.

The unit price fluctuates up and down to reflect the exact value of the investments held in the fund, with prices usually changing daily.

OEICs work in a similar way to unit trusts, except that they issue shares in a fund, rather than units. The shares still move up and down in line with the fund's underlying assets and the fund is owned collectively by all investors.

The key difference between an OEIC sub-fund and a unit trust is that OEICs are "single-priced," while unit trusts have a buy price and a sell price. The difference between these prices should reflect the initial charge, but may be higher.

With OEICs the charging structure is more transparent - you get the same price whether you are buying or selling shares, and pay the initial charge separately.

Dozens of fund management companies have switched their unit trusts to OEIC status over the past few years, with each unit trust fund becoming a sub-fund under an OEIC "umbrella." The attraction for the manager is that OEIC funds can more easily be sold in other countries where unit trusts' dual-price structure is not popular.

Unit trusts and OEICs are not the only type of collective investment fund. Competing products include investment trust and unit linked bonds, both of which have different risks and attractions.