Introduction to Unit Trusts and OEICS

Unit trusts have proved popular over the years because cash is invested in a broad spread of shares, thus reducing the risk of losing money if the market falls.

However, unit trusts are gradually being replaced by their modern equivalent, Oeics, which were first introduced in 1997. The majority of investment houses are either converting their existing unit trusts to them or are offering new Oeics.

Funds are run by investment houses. Each fund has a fund manager. The theory behind unit trusts is that the expertise of the fund manager means the shares he or she picks should outperform the market generally.

Critics say that because of the fund charges, (typically you will pay an initial charge of 5% and an annual management charge of between 1% and 1.75%), the fund has to outperform the market just to give you the same return as the market.

Remember that past performance is no guarantee of future performance and that shares can go down as well as up. It is also important to remember that experts recommend that you keep any share-based investment for at least five years.

Some fund managers have become stars in their field because of the particularly good performance of their funds. While this can be a good reason to pick a particular fund, beware. If the manager leaves or is poached by another firm, your investments may suffer.

You can invest in unit trusts and Oeics with as little as £25 a month or a £500 lump sum, which means it can be a relatively painless way to get a foothold in the stock market.

Monthly contributions also shield you to some extent from falling stock markets. If markets drop, shares in your fund become cheaper to buy, so your monthly contribution buys more. Should markets subsequently rise, the value of your investment also rises.

There are two ways you can choose to be paid any income that your fund generates. If you want a regular cash payment, you should invest in income (inc) units. Income from funds is usually paid twice a year. When you sell your units you may be liable to Capital Gains Tax. If you want any income to be reinvested in the fund, choose accumulation (acc) units.

The major dilemma for investors is which fund to choose out of more than 2,000 on the market. The choice is all-important, as the difference in performance between funds is huge and can mean either losing nearly all your money or doubling it in just a few years. Check out UK Net Guide’s feature on market sectors.

For unit trusts, contact the relevant fund management companies, discount brokers or independent financial advisers (IFA).

You can buy Oeics from authorised corporate directors (equivalent to fund managers), company sales people, IFAs, and stockbrokers.

Check out our articles on how to find a suitable IFA or stockbroker.