OEIC & Unit Trusts

What is a Unit Trust / OEIC?

Unit trusts and OEICs (Open-Ended Investment Companies) are Collective Investment schemes which allow individuals to participate in a large portfolio of assets by pooling their money together with other investors.

This gives the individual access to a much wider spread of holdings than can normally be achieved with smaller sums of money, which in turn reduces the risk. The fund is divided into units or shares, which are valued on a daily basis and reflect the underlying value of the fund. This value will fluctuate on a daily basis with market conditions.

Unit Trusts and OEICs are flexible and a relatively cheap way to invest in the stock market. They are run and regulated in a similar way, and you can hold them within an ISA.

• A Unit Trust, is a trust and you will usually find that unit trusts have two prices - the 'bid' price which is the lower price you receive when you sell, and the higher 'offer' price you pay to invest. The difference between the two prices is commonly known as the bid/offer spread. A Fund Manager buys bonds or shares in companies on the stock market on behalf of the fund. The fund is split into units, and this is what clients buy. The Fund Manager creates units for new investors and cancels units for those selling out of the fund. The creation of units can be unlimited, hence why the fund is ‘open-ended.’

The price of each unit depends on the Net Asset Value (NAV) of the fund’s underlying investments and is priced once per day. This means that the value of the units bought directly reflects the underlying value of the investment.

• An OEIC is set up as a company, there is usually a single price to buy and sell shares, so it's easier to see the actual effect of charges. OEICs operate in a similar way to Unit Trusts except that the fund is actually run as a company. It therefore creates and cancels shares rather than units when investors come in and go out of the fund, but they still directly reflect the value of the assets that the Fund Manager has invested in.

It can cost the fund managers less to run an OEIC than a Unit Trust, so some companies reduced their initial charges when they converted their Unit Trusts to OEICs, although annual charges remain much the same.

An advantage of an OEIC is that it may be cheaper to switch between an OEIC manager's different funds than between Unit Trusts because of the OEIC’s structure. Each OEIC may be made up of various sub-funds and when you buy shares in an OEIC you actually invest in one or more of the sub-funds. Changing between sub-funds, for example UK for European or vice versa, is easier than switching between completely separate Unit Trusts. Several OEIC managers have therefore cut switching charges or even offer free switches.

Find out more in our Unit Trust/Open-Ended Investment Companies (OEIC) Guide

Tell me more about Unit Trust's/OEIC's