Financial advice - Unit trusts and open ended investment companies (Oeics)

Both units trusts and Oeics are great ways of pooling your money with thousands of other people and invest in world stock markets. This often means that you get access to a far wider range of investments than you would be able to if you invest individually.  This ability to diversify has meant that unit trusts have proved incredibly popular because your money is invested in a broad spread of shares and your risk is reduced. But they are gradually being replaced by their modern equivalent, the Oeic.

Oeics (pronounced 'oiks') were first sold to UK investors in 1997. Over recent years, many unit trusts have converted to Oeics and most new fund launches are now structured as Oeics.

The differences between unit trusts and Oeics

Unit trusts and Oeics are both open-ended investments, which means that investors can freely buy and sell shares in the fund, which then grows or shrinks accordingly. It means the value of the shares you own in an Oeic, or units in a unit trust, always reflects the value of the fund's assets.

But there are a few key differences…

Pricing: 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. To make a return on your investment the bid price must rise above the offer before you sell the units. An Oeic fund has a single price, directly linked to the value of the fund's underlying investments. All shares are bought and sold at this single price, so there is no need to calculate the spread. The Oeic has been described as a 'what you see is what you get product'.

Flexibility: An Oeic fund can offer different types of share or sub fund to suit different types of investor, so private individuals can invest in the same funds as large institutions and pension fund managers. The expertise of different fund management teams can be combined to benefit both large and small investors, while streamlining the administration and management costs of the fund. Clients receive less paperwork, as each Oeic will produce one report and accounts for all sub funds, instead of separate reports for each fund.

Complexity: In legal terms, unit trusts are much more complex. In fact, this is the main reason for their rapid conversion to Oeics. Unit trusts entitle an investor to participate in the assets of the trust, without actually owning those assets. Investors in an Oeic, meanwhile, buy shares in that investment company. The ownership of unit trusts is divided into units. These rise and fall in value in line with the share price performance of the fund's underlying assets.

Management: With unit trusts, the fund's assets are protected by an independent trustee and are managed by a fund manager. Oeics are protected by an independent depository and managed by an authorised corporate director.

Charges: Unit trusts and Oeics usually have an up-front buying charge, typically 3%-5%, and an annual management fee of between 0.5% and 1.5%. It is possible to reduce these charges by investing through a discount broker or fund supermarket, but this means acting without financial advice. Charges on Oeics are pretty transparent. Any initial charge is shown as a separate item on your transaction statement - so the whole transaction is clear and easy to understand