Unit trusts and OEICs (which stands for open-ended investment companies) are investment vehicles run by fund managers, although they are marketed under the name of the management company. Unit trusts are comprised of units, OEICs are comprised of shares.
How they work
A fund management company starts a unit trust that invests in, say, UK smaller companies. £10 million is then raised from investors. The fund’s manager then invests all or most of that money in smaller company shares. As more money comes in, more units are issued, and the manager buys more shares in smaller companies. The size of the fund grows.
After a little while, some investors may want to withdraw their money. If it’s a significant amount of money, the fund manager may have to sell some of the fund’s underlying shares to raise the cash to return to the investors. When the investors receive their money, their units are cancelled.
OEICs are very similar to unit trusts. The biggest difference between the two types of fund is pricing. Unit trusts have an offer price and bid price. When you buy a unit trust, you pay the offer price; when you sell, you pay the bid price. The offer price is higher than the bid price. An OEIC has a single price that is used for both when you buy and when you sell.
How to buy options in unit trusts and OEICs
You can invest in a unit trust or OEIC by going through a discount broker, a financial advisor or by buying direct from the fund management company. The discount broker is normally the cheapest option.
Unit trust and OEIC providers calculate prices at midday on every business day.
If you buy into a unit trust or an OEIC, your buy price will be when that price is next set -- so if you order in the morning, you will buy at the afternoon price. The contract note you receive once your purchase has gone through will detail the price at which you bought.
What about charges?
As with any investment option, there’s no set rule on how much you can pay in charges. Some providers will charge a pinch, some a handful, so shop around carefully. All else being equal, it’s good to go with funds with low charges. The lower the fund’s charges, the greater the fund’s returns: as fees are subtracted from returns, the more you take out of the pot, the less there is left at the end!
One final word of warning: look out for exit charges. Some unit trusts and OEICs take a percentage of your money when you leave the fund. In fact, some funds have sneakily reduced their initial charges and then added these exit fees in so they can charge you if you remove your money within a set frame of time. So however you choose to proceed, unit trust or OEIC, be sure to get your hands on a full inventory of charges and really understand those charges before you invest.
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