OEICs & Unit Trusts: Understanding Collective Investments
What Are OEICs & Unit Trusts?
OEICs and Unit Trusts are forms of collective investment, allowing individuals to participate in a large portfolio of quoted securities by pooling their money with other investors. This provides access to a broader range of holdings, reducing risk compared to investing individually.
The fund is divided into units or shares, valued daily based on market conditions and the underlying assets. These values fluctuate regularly, reflecting the market’s performance.
How Do They work?
Both OEICs and Unit Trusts offer a flexible and cost-effective way to invest in the stock market. They are run and regulated similarly and can be held within an ISA. The key difference is structural:
- OEICs (Open-Ended Investment Companies) operate as companies with a single price for buying and selling shares.
- Unit Trusts are structured as trusts and usually have a bid/offer price spread, meaning there’s a slight difference in price when buying versus selling.
What are the Key Benefits?
- Diversification – Reduces risk by spreading investments across multiple assets.
- Professional Management – Managed by experienced fund managers.
- Tax Efficiency – Can be held within an ISA for tax-free returns.
- Cost Savings – OEICs can be cheaper to switch between funds.
- Income Options – Investors can choose to have income reinvested or paid out.
Comparing Charges & Switching Costs
Fund managers generally find OEICs cheaper to run than Unit Trusts, potentially reducing initial charges. Switching between sub-funds within an OEIC is also more cost-effective than moving between separate unit trusts. Some fund managers even offer free switches.
For a detailed comparison of investment options, visit The Investment Association.
Understanding Tax Allowances
From April 2016, new personal allowances such as the Personal Savings Allowance and Dividend Allowance were introduced. These changes impact how income from these investments is taxed. Investors should review the latest tax rules or seek professional advice.
If you’re considering investing in OEICs or Unit Trusts, Thomas Whiting Ltd. offers expert financial planning services.