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OEIC funds explained

OEIC funds explained
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You may have come across OEIC funds before, or they might be completely alien to you. We’re going to explain everything you need to know about these investment vehicles. Even if they’re a type of fund you’re familiar with, you might find something new here.

Calling all investors…

The tax year ends on 6th April – which means there’s still time to invest up to £20,000 tax-free with a stocks and shares ISA.

MyWalletHero’s experts have reviewed and ranked some of the UK’s top stocks and shares ISAs to help you make an informed choice.

Keep in mind that tax rules can change, and the value of any benefits depends on your personal circumstances.

What is an OEIC?

OEIC stands for ‘open-ended investment company’. The formal title is actually ‘investment companies with variable capital’ (ICVCs) but this is a less common name (and not as catchy).

You’ll often see them lumped together with unit trusts because they operate in a similar way. A key difference is that they’re established under company law, rather than under trust.

OEICs are open-ended. This means that there’s no limit or cap on their size. They’re the opposite of investment trusts, which are closed-ended. Both have their own benefits and uses.

OEICs are also a collective investment. So by buying shares in one of these, you would be pooling your money together with other investors. Expert managers then control the capital and can invest it into a range of assets.

What is the goal of an OEIC?

This will vary greatly depending on the fund. Some funds will focus on particular types of assets or investments, whereas others will have their own specialities. Returns can also vary widely depending on the objective of a particular fund.

One common thread is that because they’re open-ended, fund managers need to factor incoming and outgoing money when creating their investing strategy. So there are some short-term considerations that need to be considered.

The two broad categories are accumulation funds and distribution funds.

Accumulation funds

The primary objective of these funds is growth. Any income is automatically reinvested back into the fund. Investors picking this category want to grow their investment rather than produce an income.

Distribution funds

The goal of these funds is to produce an income, usually in the form of dividends or interest distributions. Investors can then choose to take the income or reinvest it back into the fund or elsewhere.

Looking to invest for the future this ISA season?

The ISA deadline is approaching so if you’ve not yet made the most of this year’s allowance, time is of the essence.

Stocks and shares ISAs allow investors to pay in up to £20,000 each year – completely tax free. There’s still time to take advantage of this year’s allowance, compare stocks and shares ISAs now.

Keep in mind that tax rules can change, and the value of any benefits depends on your personal circumstances.

A major benefit of this authorisation is the exemption of capital gains tax (CGT) within the funds. However, depending on an investor’s situation, CGT may be payable when proceeds are taken.

The European Directive on Undertakings for Collective Investments in Transferable Securities (UCITS) also affected OEICs. The design of these regulations was to allow marketing of these collective funds across borders. Although, due to Brexit, the rules set out no longer apply.

What are some advantages?

There are some notable positives to investing this way, including:

  • Dealing costs can be lower due to economies of scale.
  • Experienced investment managers are in control.
  • It provides an effective way to have a diversified portfolio.
  • They are fairly liquid, which makes them easier to sell than some other investments.
  • Managers have an obligation to buy back shares from investors wanting to sell.
  • Their share price is directly related to the value of the underlying assets in the fund.

What are some disadvantages?

Just like any investment, OEIC funds aren’t without their drawbacks, which include:

  • An array of fees such as initial charges, annual management charges, a dilution levy, an ongoing charges figure (OCF) and a total expense ratio (TER).
  • They cannot borrow on a long-term basis.
  • More than 10% of the total fund value can’t be shares from a single company (unless it’s an index tracker fund).
  • Various other investment restrictions and caps on shareholdings.
  • Forward pricing means buying units at the next valuation point, so sometimes this involves not knowing the exact price until the next day.

How much do I need to invest in an OEIC?

Each fund will have its own contribution minimums. Some will require a lump-sum payment, often a minimum of £500. Others will allow regular monthly payments starting from a lower threshold of around £25.

There are a number of different ways to purchase funds, such as:

Interestingly, buying direct doesn’t actually mean it’s cheaper or that the initial charges are lower. Discount brokers and platforms sometimes offer discounts to reduce fees.

Takeaway

OEICs can be a great way to provide a diverse and expertly managed portfolio for new investors. However, they also have lots of different fees and rules. So there may be simpler and cheaper options out there for beginners.

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*Affiliate Partner. Important information and risk disclaimer: The value of shares and any income produced can fall as well as rise, and you may get back less than you invest. Exchange rate fluctuations can reduce the sterling value of any overseas holdings.


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