Unit trusts and Open-Ended Investment Companies (OEICs) are professionally managed collective investment funds. A fund manager pools money from many investors and buys shares, bonds, property or cash assets and other investments. This guide covers on-shore, that means UK-based, OEICs and unit trusts.
- When might a unit trust or OEIC be right for you?
- How they work
- Risk and return
- Access to your money
- Safe and secure?
- Where to buy a unit trust or OEIC
- Tax on interest and dividend payments
- If things go wrong
When might a unit trust or OEIC be right for you?
If you don’t understand a financial product, get independent financial advice before you buy.
These might be for you if:
- you want to invest in shares or other assets but don’t have the time, interest or expertise to know what mix to go for
- you understand you might get back less than you invested, and you’re comfortable with that
- you can save at least £25 a month or can invest a lump sum of £500
How they work
- You buy shares (in an OEIC) or units (in a unit trust).
- The fund manager puts your money together with money from other investors and uses it to invest in the fund’s underlying assets.
- Every fund invests in a different mix of investments. Some only buy shares in British companies, while others invest in bonds or in shares of foreign companies, or other types of investments.
- You own a share of the overall unit trust or OEIC – if the value of the underlying assets in the fund rises, the value of your units or shares will rise. Similarly, if the value of the underlying assets of the fund falls, the value of your units or shares falls.
- The overall fund size will grow and shrink as investors buy or sell.
- Some funds give you the choice between ‘income units’ or ‘income shares’ that make regular payouts of any dividends or interest the fund earns, or ‘accumulation units’ or ‘accumulation shares’ which are automatically reinvested in the fund.
Read more facts about funds on the Investment Association website.
Risk and return
- The value of your investments can go down as well as up and you might get back less than you invested.
- Some assets are riskier than others. But higher risk also gives you the potential to earn higher returns. Before investing, make sure you understand what kind of assets the fund invests in and whether that’s a good fit for your investment goals, financial situation and attitude to risk.
- Unit trusts and OEICs help you to spread your risk across lots of investments without having to spend a lot of money. Read more about Diversifying.
Access to your money
- Most unit trusts and OEICs allow you to sell your shares or units at any time – although some funds will only deal on a monthly, quarterly, or twice yearly basis. This might be the case if they invest in assets such as property, which can take a longer time to sell.
- However, bear in mind that the length of time you should invest for depends on your financial goals and what your fund invests in. If it invests in shares, bonds or property, you should plan to invest for five years or more.
- Money market funds can be suitable for shorter time frames.
When you invest in a fund there are several charges and costs which you should consider. These charges mainly cover the costs of running and managing the fund.
These are usually taken directly from the fund. This means your fund will need to perform well enough to provide a return (profit) for you or the value of your investment will be lower as a result of the charge. Charges can vary between funds or even between different share classes of the same fund.
Always check what the initial and on-going charges will be and compare them with other options.
Here are some of the different fees and charges you might pay:
- Initial charge: The charge for buying new shares or units varies but expect the typical initial charge to be around 2%. For example, if you have £100 to invest and the initial charge is 2%, you’ll get shares worth £98.
- Bid-offer spread: Many unit trusts have both ‘bid’ (buy) and ‘offer’ (sell) prices for their units. The price you get if you’re selling is slightly lower than the price you pay if you’re buying. Some OEICs (and some unit trusts) only quote a single price
- On-going charges figure (OCF)/ Total Expense Ratio (TER): The OCF figure previously known as the TER (which is broadly similar to the OCF figure) gives an indication of the cost of investing in a manager’s fund. The OCF includes most of the fees and charges incurred by the fund including the annual management charge, registration fee, custody fees and any distribution costs. It excludes One-Off Charges (e.g. entry, exit or switching charges), Incidental Costs (e.g. performance fees) and Portfolio Transaction Costs (the costs of buying or selling assets for the fund). The OCF figure provides a standard way of measuring the annual cost of investing in a fund and is based on the previous year’s financial expenses.
- Annual Management Charge (AMC): An annual charge for the manager’s services. It can be up to 1.5% or more of the value of your shares, but some funds that invest based on automatic rules – like index trackers – might have much lower annual management fees.
- Exit or Redemption charge: The charge for selling shares or units, charged as a percentage of the total value of the sale. Many unit trusts and OEICs do not charge exit fees.
Safe and secure?
Fund assets are held in safekeeping on your behalf by a trustee or depositary. If an authorised investment firm goes into default, your assets are protected. You continue to own your investment and the fund’s assets are still invested as before.
If your money is mismanaged – for example, the manager invests in something the fund shouldn’t be invested in – then the firm would be required to compensate you and other investors.
If it didn’t have enough money and, therefore, went out of business, then the outstanding compensation would be covered by the Financial Services Compensation Scheme (FSCS) up to £50,000 per person if it failed after 1 Jan 2010 but before 31 Mar 2019.
If the firm failed on 1 Apr 2019 or after, then you may be covered if the firm gave you:
- misleading advice
- provided poor investment management, or
- mis-represented the firm which gave you the initial advice which has since failed up
You would then be compensated up to £85,000 per person or firm.
You cannot claim compensation simply because the value of your investment falls below what you paid for it. All investment involves risk.
Where to buy a unit trust or OEIC
You can buy a unit trust or OEIC:
- through an agent with ties to the manager
- directly from the fund management company
- through an online fund platform or discount broker
- through an online share dealing service or stockbroker
- through an independent financial adviser or financial planner.
If you’re not sure what kind of fund fits your needs, it’s a good idea to Talk to an independent financial adviser.
Tax on interest and dividend payments
Interest distributions from UK domiciled funds are paid gross. This means no tax has been deducted from the payment.
If you own shares, you might get income in the form of dividends. Dividends are a portion of the profits made by the company that issued the shares you’ve invested in. Dividends from UK domiciled funds are also paid gross.
In April 2018, a new tax-free Dividend Allowance of £2,000 a year was introduced for all taxpayers. Dividends that fall within your Personal Allowance do not count towards your dividend allowance. Dividends above this level are taxed at:
- 7.5% (for basic rate taxpayers)
- 32.5% (for higher rate taxpayers)
- 38.1% (for additional rate taxpayers).
You do not need to tell HMRC if your dividends are within your dividend allowance for the tax year. If you need to pay tax, how you pay depends on the amount of dividend income you got in the tax year.
Capital Gains Tax
When you cash in your shares or switch between funds you may incur a liability to Capital Gains Tax (CGT).
Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive. So you might have to pay CGT if you sell your investment and make a profit.
The Capital Gains Tax allowance in 2019-20 is £12,000.
The CGT allowance is the amount of profit you can make before CGT is payable. The CGT rate for assets is currently 10% if you’re a basic rate taxpayer and 20% if you’re are a higher or additional rate tax payer.
If you are married or in a civil partnership, you are free to transfer assets to each other without any CGT being charged.
Any dividends or interest payments received within a pension or an ISA remain effectively tax-free.
If things go wrong
Most fund managers are regulated by the Financial Conduct Authority.
If you’re unhappy with the service you get or you want to make a complaint, read our guide Sort out a money problem, make a complaint or get compensation.
This article is provided by the Money Advice Service.