Unit trusts and open-ended investment companies (OEICs) operate by pooling your money with that of other investors (both institutional and private) to invest in global stock markets and/or a range of other financial instruments. Although most unit trusts and OEICs invest in the shares of other companies, some give to access a range of other asset classes, including corporate bonds, gilts, cash, other funds and property.

Both types of fund are open-ended, which means that cash investors are free to buy and sell any shares or units they have purchased and the fund will grow or shrink accordingly. Therefore, the value of your investment in an open-ended fund will always reflect the value of the underlying assets – that is, the fund’s holdings, plus any uninvested cash. This is quite different to how an investment trust [insert link to IT guide] operates.

For the purposes of the retail investor, there isn’t a massive difference between OEICs and unit trusts – the major distinction is in the legalities surrounding each type of fund. Very basically, OEICs are companies in which you can buy shares, while unit trusts are funds in which you buy units. The Financial Services Authority (FSA), the regulator of the financial services sector, has relaxed the rules surrounding OEICs in recent years. This has not only resulted in more OEICs being created but has also encouraged a lot of providers to convert their unit trusts into this form.

Unit trusts and OEICs invest in a wide range of sectors and regions. They are also divided into categories for ease of comparison: income, growth and specialist funds. Income funds include UK gilts and bonds, as well as global bonds for immediate income, or UK equity income investments that aim to grow your income over time.
Growth funds, on the other hand, are split into those that concentrate on capital protection or capital growth. The former include funds with built-in protections, such as guaranteed or capital protected funds. Growth areas include funds investing in North America or Europe, for example, or in emerging markets.

Specialist funds cover those that don’t fit into the two sectors detailed above, such as funds available for pension plans. 

For more information on unit trust sectors, see the performance tables printed in What Investment every month or visit the Investment Management Association’s (IMA’s) website at www.investmentuk.org

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