Collective investments may appeal to you if you want to invest in a range of different assets but don’t have the time or knowhow to build a portfolio yourself.
OEICs (Open-Ended Investment Companies) are companies that invest in assets (such as securities) on your behalf. You buy shares in the company itself, which rise or fall depending on its performance.
Unit trusts are similar to OEICs, in that you buy units of an investment funds that invests in a range of different assets.
Open-Ended Investment Companies (OEICs) are a type of collective investment where you invest your money alongside other investors, spreading the risks involved. If you invest in an OEIC you buy shares in the Open-Ended Investment Company itself. They will then use the money pooled from all the investors to buy assets on your behalf, such as stocks and shares, gilts, and property.
As you own a share in the OEIC, the value of the assets that company has invested in will determine the value of your share. So if the value of the assets increases, so will the share price at which you can sell your share. Similarly if the value of the assets decreases, the share price will decrease too. The investment is ‘open-ended’ as the assets (represented by your shares), can be changed, bought or sold at any time.
OEICs can be a suitable investment type if you want to invest in assets such as stocks and shares but do not have the knowledge or expertise yourself. You will usually need to invest at least £25 a month, and can put in up to a £500 lump sum. If you are going to invest in an OEIC it’s important to understand the level of risk involved. Some investments involve more risk than others – for example investing in emerging markets like China and Brazil will be more high risk that investing in the UK. It’s a good idea therefore to make sure you know what kind of assets the OEIC invests in to make sure they fit in with your investment plan.
Unit trusts, like OEICs, are a type of collective investment that allows you to invest your money along with many other investors. Collective investments can be good investments, as everyone’s money is pooled together which spreads the risk involved.
In a unit trust, you can buy or sell ‘units’ of a fund that’s run by a fund manager. The fund manager will invest in a number of different companies and assets (such as gilts or property) and will try to forecast which are likely to go up in value over time. The fund can either be active or passive: active funds are actively managed by a fund manager who decides the best investment for the fund – typically a high-risk investment while passive funds follow the market more closely and are regarded as a lower risk investment.
As a unit trust invests in a range of different assets, the risk to your money is spread. It is important to know that the value of your units can go down as well as up, depending on the value of the assets. Any growth you do achieve on your investment will be converted into additional units although you can arrange to take this growth as income if you wish.
An independent financial adviser (IFA) can help to choose a unit trust that has the right investment strategy for you, as well as explaining any potential benefits and risks involved.
Things to consider
Should I invest in an active or passive Unit trust?
Will I get any interest or dividends on my money?
What are the charges involved, and what are they for?
How does this Unit Trust differ from an OEIC?
How long should I keep my money in a Unit Trust?