Unit Trusts and Open-Ended Investment Companies (OEIC):
Differences and Relative Merits

This article explains and discusses the relative merits of common types of Open-Ended Investments: Unit Trusts and Open-Ended Investment Companies (OEICs).

Unit trusts and OEICs are both popular ways of making money through collective investment. They are known as 'open ended' because the size is unlimited. They are considered a more secure form of investment than individual stocks.

The price of a unit trust or OEIC unit is determined by the value of the underlying investment. This means that it can be unwise to buy or sell units when markets are moving rapidly in either direction. The operation of a particular unit trust is also restricted by the number and size of the investments that it has attracted. If a fund suffers a large number of investor redemptions, then it will be forced to sell some of its assets in order to provide for those who are selling out. Similarly, when more investors decide to put their money into a particular trust, that trust must purchase more assets in order to maintain its investment profile.

Unit trusts and OEICs: The Differences

Both unit trusts and OEICs calculate their prices every day around noon. One difference between the two investment vehicles, however, is that OEICs have only one price, and have an initial charge which is taken as a commission. Unit trusts, however, calculate two prices - a 'bid' price and an 'offer' price. Purchases are made at the offer price and sales are made at the bid price, and the difference (the bid-offer spread) is taken as commission by the fund manager.

Where can I invest?

If you want to invest in a unit trust or OEIC there are a number of ways to go about it. You can contact a provider directly, or you can buy funds through a personal equity plan (PEP) or individual savings account (ISA) with a company like Legal and General. Alternatively, you can use a nominee account or a discount broker who may be able to offer you a better deal.

Your units will generally be bought for you when the price is next set - so if you place your order in the morning the purchase will be made at noon. A contract note will be sent to you once the transaction is completed, and you should keep it for your records. The fund's trustees will hold your money once it is in the trust, and they have an obligation to employ a management company that will manage the fund according to its stated objectives.

The charges that will be levied on your money will vary between trusts. Some trusts charge as much as 6 per cent as an initial charge and an ongoing management fee of 2 per cent per annum. Others will have no initial charge but have an ongoing management fee of around 1 per cent per annum. Generally speaking, the lower a fund's charges, the better its performance is likely to be.

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

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