The value of investments can fall as well as rise. You may get back less than you invested.
In the last two articles, we’ve introduced you to the idea of funds and explained how different funds can be managed. Today, we’re going to continue our journey by looking at the three popular classes of fund – Unit Trusts, Investment Trusts and OEICs.
With a Unit Trust, a Fund Manager buys bonds or shares in companies on the stock market on behalf of the fund and will make all of the decisions around what to buy, what to sell and when to do it. The fund is split into units… hence the name – and this is what you’ll buy (and perhaps sell). When investing in unit trusts, you buy units at the offer price and sell at the lower bid price. The difference in the two prices is known as the spread and to make a return on your investment the bid price must rise above the offer before you decide to sell … sounds a bit confusing doesn’t it?
It’s for this reason and complexities around the legal structure of Unit Trusts which have led to their demise in recent years, as they rapidly get replaced by their modern day counterpart – OEICs.
OEICs (Open Ended Investment Companies)
OEICs (pronounced ‘oiks’) operate in a similar way to Unit Trusts except that the fund is actually run as a company in its own right. This means, instead of buying units in a fund, you buy shares in the OEIC. When it comes to selling your shares, it’s a far less complex affair when compared to selling units in a trust. Whatever the share price is on the day of the sale, that’s what you’ll get… “simples”. OEICs also tend to have lower management fees.
Returns from both Unit Trusts and OEICs are paid through distributions which can be monthly, quarterly or every six months, depending on the type of fund that you invest in. These distributions derive from the dividend payments received by the fund from the underlying shares within which they invest, or interest payments from bonds or even rental income in the case of property. It goes without saying that the fund manager will take their management fee before passing a distribution on to the end investor (you).
Investment Trusts are the elder statesman of the investment world and have been around since the late 1800s. Like an OEIC, an Investment trust is set up as a company – however, the big difference is that the company is floated on the London Stock Exchange. As with any company quoted on the stock exchange, investment trusts have to publish an annual report and audited accounts. They also have a board of directors to which the manager of the trust is accountable and which looks out for the shareholder’s interests. When you invest in an investment trust, you become a shareholder in that company and that means you’ll get paid a regular dividend based on the company’s performance.
Investment trusts can be appealing as they generally have lower annual charges than unit trusts and the potential for higher returns. They can also invest in a wider range of securities.
So how do you know which type of fund is best for you. Well, with so many variants of fund to choose from, the best place to start is by speaking to a qualified professional such as a Financial Adviser.
Here at Credius we’ve got a great team ready to help you make the best investment choices so why not call us today on 020 7562 5858 or email us at email@example.com. We’d love to hear from you.