Investment funds come in a variety of formats and acronyms – the differences are worth knowing.
The days of individuals largely owning UK shares have long passed. The latest National Statistics data shows that in 2020, only 12% of shares were held by individuals. One reason behind that level has been the growth of investment funds – sometimes called collective funds – which pool capital from a range of investors. This approach offers a much greater diversification of holdings than most individual investors could achieve.
In the UK there are now three main types of collective funds vying for the private investor’s attention: unit trusts, open-ended investment companies (OEICs) and exchange traded funds (ETFs).
Unit trusts have been around since 1930s and were once the dominant type of investment fund. As the name suggests, their structure is based around a trust, with investors owning ‘units’ in the trust in proportion to their investment. The trust is open-ended, allowing it to create more units as new investors arrive or cancel units as investors cash in and leave.
OEICs are in some ways the successors to unit trusts, although many unit trusts still exist. Instead of a trust-based structure with unitholders, the OEIC is a company-based structure with shareholders. Many EU-based funds and US mutual funds have a very similar structure to OEICs, which first appeared in the UK in 1997. For the individual investor, OEICs look virtually identical to unit trusts, with the same tax treatment and regulatory framework. As with the unit prices of unit trusts, OEIC share prices are calculated by the fund, based on the value of the underlying investments, with sales and purchases via the manager usually occurring at a fixed time each day.
ETFs are the (relatively) new kids on the block. They have a corporate structure like OEICs, but their shares are traded on the stock exchange, so can be bought and sold at any time the exchange is open. An ETF’s share price is not calculated by the manager but decided by the market. In practice the market price of an ETF share normally very closely matches the value of the underlying investments.
The similarities between this trio of structures hide some subtle differences, making it best always to take advice before choosing an investment fund.
To discuss your financial planning, contact our Sheffield based Financial Advisers on 0114 266 4432 or info@smh.group
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