Unit trusts and Open Ended Investment Companies (OEICs) are kinds of collective investments. Individuals investment are pooled with others and then invested together by the investment manager.
Different unit trust and OEIC funds purchase different types of asset. Shares, bonds, cash and property. Some funds target only one asset class, while others invest in several.
Most fund managers hold a large spread of investments within their stated asset class or classes. That is one reason why unit trusts and OEICs are favored by investors. Spreading investments across many businesses can assist in reducing the fund’s risk.
Unit trusts and OEICs both are open-ended investments but there are key differences between these kinds of funds.
Collective Investments – Unit Trusts
With unit trusts you buy and sell part of the total fund via units. The purchase price you initially buy units (the bid price) is greater than the amount you can sell the units for (the offer price). The difference between the prices is known as the spread. To make money, the closing bid price must be greater than the opening offer price.
Collective Investments – OEIC’s
An OEIC fund does not have units, it issues shares and is therefore an investment company. Less complex when compared to a unit trust. Shares within an OEIC use a single price. This depends on the value of the fund’s underlying investments. All shares in an OEIC are bought and sold at one single price. As such there is no bid offer spread to consider.
The value of a unit trust or OEIC varies based on the total valuation of the fund. This is based on the performance the fund manager achieves. Unit trusts and OEICs usually have an up-front charge and annual management fees, most of which are declared as being a percentage of overall the investment, however some are designed within the price.