OEIC funds explained

We explain everything you need to know about OEIC funds to help you decide if they would make a good investment for you.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Close-up Of A Piggybank With Eyeglasses And Calculator On Desk

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Who regulates OEIC funds?

The Financial Conduct Authority (FCA) has to authorise OEIC funds and approve the fund manager before any marketing to UK investors.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »