What is an OEIC?
OEIC stands for Open Ended Investment Company. They are professionally managed collective investment schemes that pool your money with other investors.
What are the pros and cons?
Pool your money so they can invest in a wider range of shares
Spread the risk across different investments
Managed by investment professionals
Regulated and protected by FSCS
Your money is at risk and the value of your shares could decrease
Your investment may be subject to tax
You will need to pay fees to invest
How do OEICs work?
When you invest in an OEIC you buy shares in the company. The total number of these shares changes over time as they are bought and sold.
Your money is then combined with other investors' and invested in a selection of stocks, shares and other assets by the fund manager. This is known as the fund's investment portfolio.
Pooling your money with other investors gives the fund manager more buying power to make larger and more diverse investments than you could make on your own. This reduces risk by spreading the money across a number of different investments.
The value of an OEIC fund is linked to the performance of its portfolio: when the value increases, the value of your shares grow too, and the same applies if the value goes down.
What does 'Open Ended' mean?
OEICs are "Open Ended", which means shares are issued each time someone invests and you can buy or sell shares whenever you want. The size of the fund will grow or shrink to mirror this.
How do OEICs invest your money?
The fund managers choose which shares to buy, and they manage the OEIC fund on an ongoing basis to achieve the aims of the OEIC, for example long term growth or to earn regular profit.
They invest in securities, which can be categorised by:
Asset class e.g. equites, fixed interest or money market instruments
Geography e.g. UK equity, emerging markets or Asia
Sector type e.g. telecoms or technology
Investment aims e.g. income or growth
Some OEICs will invest in multiple assets to create a diversified portfolio.
How do OEICs make you money?
The value of your shares will increase when the value of the underlying assets in the OEIC rise, and decrease when they fall. Some OEICs give you the option of buying income shares or accumulation shares:
Income shares make a regular payout of any dividends the fund earns. This type of share is not offered by every OEIC and may not be available if you choose to invest on a monthly basis.
Accumulation shares automatically reinvest in the fund until you decide to cash in. This option is designed for long term growth.
Most OEICs let you sell your shares at any time but some may only allow sale at certain times of the year so check this before you invest.
Most OEICs are designed for medium to long term investment of between 5 and 10 years. Exactly how long you invest for will depend on your financial goals and the success of the fund.
Are there any fees or charges?
Yes, there are two main fees involved when investing in OEICs, other than the cost of purchasing the shares:
Entry or buying charge (3%-5%)
Annual Management Charge (AMC) (around 1.5%)
You could avoid or reduce the entry fee by buying your shares through an execution only broker or a fund supermarket. Only use these options if you are confident about what you are investing in as they offer no advice.
You may be charged an exit fee for selling shares, but many OEICs do not charge this, or charge it in place of an entry charge.
What are the tax implications?
Any dividend income is subject to income tax if you are higher or additional rate taxpayer:
Higher rate - 25%
Additional rate - 30.56%
Any profit you make when you sell your shares will also be subject to Capital Gains Tax. Find out more about on the GOV.UK website.
You can invest in OEICs tax free through an Investment ISA so your profits will be free from Capital Gains and Income Tax.
During the 2015-16 tax year you can invest up to £15,240 in a stocks and shares ISA.
What are the risks?
The main risk is that the value of the OEIC could decrease.
Although OEICs attempt to manage risk by investing in a diverse portfolio and calling on the experience of professional fund managers, there is always a chance your investment could devalue.
You can manage the risk by choosing a fund that invests in established sectors and companies rather than riskier markets.
Bear in mind you will be charged fees so the growth of the OEIC will need to cover these otherwise they will eat into the money you have invested.
Are OEICs regulated?
Yes, each OEIC has a board called the Depository who ensure the fund manager adheres to company policy and government legislation.
OEICs are also regulated by the Financial Conduct Authority (FCA), which means services such as the Financial Ombudsman are available to investors if problems arise.
OEICs are not directly covered by the Financial Services Compensation Scheme - but their parent company will be. The maximum claim via the FSCS is £50,000 per person, per company, but remember this will not cover your investment losses, only if the company goes bust.
Is an OEIC right for you?
Whether an OEIC is the right choice for you is down to your situation and preference. Consider:
How risk adverse you are
How long you have to invest
How much you have to invest
Make sure you fully understand the risks involved before you invest. It is worth seeking professional advice before you make any investment decisions.