Unit Trusts and Open-Ended Investment Companies (OEIC): Overview

This overview explains and discusses the relative merits of unit trusts, a form of open-ended investment companies.

Unit trusts are a form of open-ended collective investment. Each unit trust can contain an unlimited number of 'units', which are created when money is invested and cancelled when money is withdrawn. The value of the trust's underlying assets can be calculated by multiplying the total number of units issued by the price of a unit - for example, if a trust has issued one million units and values their unit price at £10, the total value of that trusts' assets will be equivalent to £10,000,000.

What is a Unit Trust

Each unit trust fund has an investment objective that will determine how its funds are to be deployed. Each will also generally have a similar structure: A fund manager will run the trust. The trustees of the fund will ensure that the fund manager sticks to the investment objectives. The unit holders will have the right to the trust's assets, and distributors will allow the unit holders to transact in the fund manager's unit trust. Every unit trust will also generally have registrars, who act as middlemen between the fund manager and other stake holders.

Unit trusts calculate their unit prices once per day. There are generally two prices - a 'bid' price, at which sales are made, and an 'offer' price, at which purchases are made. The difference between the two prices (referred to as the 'bid-offer spread') is a commission which goes to the fund manager. The bid-offer spread is generally around 5 per cent, but can vary depending on market conditions and the individual trust.

Open-Ended Investment Companies (OEICs)

Open-Ended Investment Companies (OEICs) are a close relation to unit trusts. They operate in a similar way, but without different bid and offer prices. In other words, OEICs do not apparently exact a commission. Investors should be wary, however, since most OEICs have a dilution levy in which they can hide charges.

If you want to invest in a unit trust, then you can do so through buying directly from the fund manager, or through a personal equity plan (PEP) or individual savings account (ISA) with a company like Legal and General. Another cheaper option may be to contact a discount broker who can facilitate your investment in a unit trust.

The opinions and statements expressed in this paid article reflect those of its authors and not those of AlphaProfit.

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