Unit trusts and Oeics are very similar, although their structure is technically slightly different. In a unit trust, investors buy "units" whereas in an Oeic, investors buy a "share", because an Oeic is a company rather than a trust.
The value of units and shares rises or falls in line with the investments the fund holds. Many unit trusts have been converted to Oeics in recent years. Neither are listed on the Stock Exchange.
Unit trusts and Oeics invest in cash, bonds or equities and investors can generally buy or sell their investment through a fund manager on any working day. Investors who buy a unit trust or Oeic directly may use a "fund supermarket" or a "discount broker", which frequently operate on the internet.
One of the main differences between a unit trust and an Oeic is that unit trusts have two prices - buying and selling prices known as offer and bid prices. The offer price is generally higher than the bid price. Oeics have a single price and they may have different classes of shares for different investors.
Unit trusts and Oeics are authorised by a regulator and are subject to rules designed to provide investor protection. The assets are held by an independent authorised firm, known as a trustee or a depository. Most funds available in the UK are authorised by the independent regulator, the Financial Services Authority and are covered by the Financial Services Compensation Scheme.
Some funds are authorised elsewhere in the European Union such as in Dublin or Luxembourg.
Investment trusts
Investment trusts are companies listed on the Stock Exchange. They were the original collective investment fund and were set up to provide investors with easy, low-cost access to shares. The first one, the Foreign & Colonial Investment Trust, was established in 1868.
In general, an investment trust's share price fluctuates in line with the value of its investments, but the two do not always match. The share price can be influenced by other factors, such as investor demand and market sentiment. If the share price is below the value of the assets, it is said to be at a "discount" to the net asset value. If it is above the net asset value, the share price is at a "premium".
An investment trust is structured like a company, with an independent board of directors. The fund manager reports to the board.
Investment trusts can do certain things that unit trusts and Oeics cannot. For example, they can borrow money to invest - this is called gearing, or leverage. Gearing can mean that exceptional gains are made during market rebounds, when it is often difficult to move quickly enough to get invested and the prices of stocks are rising very quickly. Gearing can also magnify losses in falling markets.
Investment trusts are closed-end funds, unlike unit trusts, which are open-ended. This means that they have a fixed number of shares.
