Unit Trusts and OEICs are both collective investments which pool investors' funds to allow a fund manager to buy stocks and shares on their behalf. They are designed to spread the risks and reduce the costs for small investors.
Collective funds originated in the 1930s in order to allow small investors to place limited sums across a spread of shares. There are two main risks to investing in stocks and shares. First is insufficient spread of companies; second is that a share can only be sold if there is a willing buyer in the market. Unit Trusts and OEICs seek to mitigate both of these risks by combining the assets of many small investors.
The thing which is unique about Unit Trusts and OEICs is that unlike a stock or a share, units in the trust can be created and dissolved at will by the Unit Trust’s manager. With the exception of property Unit Trusts, where the underlying assets can be quite illiquid, an investor in a Unit Trust or OEIC can sell their units back to the manager at a known price as reported daily.
There is very little difference in the structure of a Unit Trust and an OEIC (Open-Ended Investment Contract). Both have a trust deed which appoints the manager and defines the areas in which that Unit Trust or OEIC can invest. A Unit Trust has a defined timeframe, whereas, as the name suggests, an OEIC is open-ended.
Unit Trusts/OEICs are a very useful tool for managing and balancing asset allocation, as they can be very sector-specific, or indeed very general in their investment theme. For example, you may choose OEICs and Unit Trusts that invest only in emerging markets, or where the trust specifically excludes non-ethical companies.
Unit Trusts/OEICs are very often wrapped with ISA wrappers and can also be held in SIPPS. Both are free from Capital Gains Tax within the fund, although they pay Income Tax at 20% within the fund. When realised at a gain, the investor has a liability to Capital Gains Tax (18% for basic rate taxpayers, 28% for higher rate taxpayers). But the individual can use their annual CGT allowance (£10,100 tax year 2012-13) to offset this gain. Any other capital losses realised can also offset any capital gain.
Unit Trusts and OEICs are the most commonly used tool for accessing the equity market and allows a relatively modest amounts to be spread widely amongst sectors and geographical regions. They can be an appropriate vehicle for your investment portfolio, but we recommend you take advice before investing. If you like to to talk to an LGBT-friendly financial adviser about this or any other financial matter, please enter your postcode under the map on your right to find an adviser near you.
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