Open-Ended Investment Companies
What does ‘Open Ended’ mean?
OEICs may be an attractive option for new investors, but before you make a decision you need to understand the basics.
OEICs are “Open Ended”, which means units are issued each time someone invests and you can buy or sell units whenever you want.
Open-ended Investment Companies (OEICs) are a collective investment fund which are professionally managed. A fund manager combines money from numerous investors and acquires shares, property, bonds, or cash assets and other investments.
With all investments there are both advantages and disadvantages. Some to consider are:
- Your money is pooled so it can be invested in a wider range of shares, that helps with diversification and helps reduce risk
- Managed by investment professionals
- The risk can be spread over different investments
- Protected and regulated by the FSCS (subject to limits)
- Investments may be subject to tax
- You risk the value of your investment decreasing
- There are fees to pay when investing
Before you make any investment decisions it is worth seeking professional advice to ensure you fully understand the risks involved.
OEICS may be right for you if:
- You are comfortable with the risk and understand you may get back less than you invested
- You want to invest a lump sum or a regular monthly amount
- You don’t have the time, expertise or interest but want to invest in collective investments
How do OEICS work?
A fund manager combines your money together with other investors and uses it to choose which assets to buy. These are typically a combination of shares, corporate bonds, gilts, cash and property. The fund manager has more buying power when investors pool their money in this way. By spreading the money over numerous assets it helps reduce the risk. Please bear in mind that the length of time you should invest for depends on your financial goals and what your fund invests in. If investing in shares, property or bonds, you should aim to invest for five years or more.
The performance of the portfolio is reflected in the value of the OEIC. OEICs manage risk by investing in multiple assets to develop a diversified portfolio.
Charges are taken from the fund to cover fund management costs. If returns are low, charges may eat into your capital. Ensure you always know both the initial and on-going costs in the form of an annual management charge. You could be charged an exit fee for selling shares, but most OEICs do not charge this.
You can invest in OEICs tax-free through an Investment ISA so your profits will be free from Capital Gains and Income Tax. If you have maximised your ISA then you can also hold an investment outside of an ISA wrapper. This is often referred to as a general investment account/investment portfolio. Any gains from this will be subject to Capital Gains Tax. Each individual currently has a capital gains allowance of £11,700 which is increased annually in line with CPI rounded to the nearest multiple of £100. This means you could earn this amount in profit before having to pay any capital gains tax on further profits.
During the 2019/20 tax year, you can invest up to £20,000 in a stocks and shares ISA.