Unit trusts and Open-Ended Investment Companies (OEICs) are professionally managed collective investment funds. Managers pool money from many investors and buy shares, bonds, property or cash assets and other investments. This guide covers on-shore, that means UK-based, OEICs and unit trusts.
When might a unit trust or OEIC be right for you?
If you don’t understand a financial product, get independent financial advice before you buy.
These might be for you if:
- you want to invest in shares, or other assets but don’t have the time, interest or expertise to know what mix to go for
- you understand you might get back less than you invested, and you’re comfortable with that
- you can save at least £25 a month or can invest a lump sum of £500
How they work
- You buy shares (in an OEIC) or units (in a unit trust).
- The fund manager puts your money together with money from other investors and uses it to invest in the fund’s underlying assets.
- Every fund invests in a different mix of investments. Some only buy shares in British companies, while others invest in bonds or in shares of foreign companies, or other types of investments.
- You own a share of the overall unit trust or OEIC – if the value of the underlying assets in the fund rises, the value of your units or shares will rise. Similarly, if the value of the underlying assets of the fund falls, the value of your units or shares falls.
- The overall fund size will grow and shrink as investors buy or sell.
- Some funds give you the choice between ‘income units’ or ‘income shares’ that make regular payouts of any dividends or interest the fund earns, or ‘accumulation units’ or ‘accumulation shares’ which are automatically reinvested in the fund.
Read more facts about funds on the Investment Association website.
Risk and return
- The value of your investments can go down as well as up and you might get back less than you invested.
- Some assets are riskier than others. But higher risk also gives you the potential to earn higher returns. Before investing, make sure you understand what kind of assets the fund invests in and whether that’s a good fit for your investment goals, financial situation and attitude to risk.
- Unit trusts and OEICs help you to spread your risk across lots of investments without having to spend a lot of money. Read more about Diversifying.
Access to your money
- Most unit trusts and OEICs allow you to sell your shares or units at any time – although some funds will only deal on a monthly, quarterly, or twice yearly basis. This might be the case if they invest in assets such as property, which can take a longer time to sell.
- However, bear in mind that the length of time you should invest for depends on your financial goals and what your fund invests in. If it invests in shares, bonds or property, you should plan to invest for five years or more.
- Money market funds can be suitable for shorter time frames.
Unit trusts and OEICs come with costs.
The fund will need to perform well enough to more than cover them if it’s to produce returns for you.
If returns are low or negative, charges might eat into your capital. Always check what the initial and on-going charges will be and compare them with other options.
Here are the different fees and charges you might pay:
Initial charge: The charge for buying new shares or units varies but expect the typical initial charge to be around 2%. For example, if you have £100 to invest and the initial charge is 2%, you’ll get shares worth £98.
Bid-offer spread: Many unit trusts have both ‘bid’ (buy) and ‘offer’ (sell) prices for their units. The price you get if you’re selling is slightly lower than the price you pay if you’re buying. Some OEICs (and some unit trusts) only quote a single price.
Annual Management Charge (AMC): An annual charge for the manager’s services. It can be up to 1.5% or more of the value of your shares, but some funds that invest based on automatic rules – like index trackers – might have much lower annual management fees.
Total Expense Ratio (TER)/ On-going charges figure (OCF): The OCF figure has to be quoted by most funds except in some cases where the TER is allowed. It includes the AMC and some other expenses. It’s a useful way to compare different products but it does not include dealing charges which can add considerably to the annual costs if the fund has a high turnover of investments.
Exit charge: The charge for selling shares or units, charged as a percentage of the total value of the sale. Many unit trusts and OEICs do not charge exit fees.
Safe and secure?
Fund assets are held in safekeeping on investors’ behalf by a trustee or depositary.
If an authorised investment firm goes into default, your assets are protected.
You continue to own your investment and the fund’s assets are still invested as before.
If your money is mismanaged – for example, the manager invests it in something the fund shouldn’t be invested in – then the firm would be required to compensate investors.
If it didn’t have enough money and, therefore, went out of business, then the outstanding compensation would be covered by the Financial Services Compensation Scheme (FSCS) up to £50,000 per person.
You cannot claim compensation simply because the value of your investment falls below what you paid for it. All investment involves risk.
Where to buy a unit trust or OEIC
You can buy a unit trust or OEIC:
- Through an agent with ties to the manager
- Directly from the fund management company
- Through an online fund platform or discount broker
- Through an online share dealing service or stockbroker
- Through an independent financial adviser or financial planner
If you’re not sure what kind of fund fits your needs, it’s a good idea to Talk to an independent financial adviser.
From 2017/18 interest paid by such funds will be gross and no longer taxed at source.
If you own shares, you might get income in the form of dividends.
Dividends are a portion of the profits made by the company that issued the shares you’ve invested in.
If you have an investment fund that is invested in shares, then you might get distributions that are taxed in the same way as dividends.
In April 2016, a new tax-free Dividend Allowance of £5,000 a year was introduced for all taxpayers (this tax free allowance will fall to £2,000 in April 2018).
Dividends above this level are taxed at:
- 7.5% (for basic rate taxpayers)
- 32.5% (for higher rate taxpayers)
- 38.1% (for additional rate taxpayers)
Any dividends received within a pension or ISA will remain effectively tax-free.
Basic rate payers who receive dividends of more than £5,000 need to complete a self-assessment return.
If things go wrong
Most fund managers are regulated by the Financial Conduct Authority.
If you’re unhappy with the service you get or you want to make a complaint, read our guide Sort out a money problem, make a complaint or get compensation.
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