Equity investment can be confusing, so investing through an OEIC makes sense via both managing your money and limiting the risk. We show you how to choose the best OEIC equity fund.
OEICs (Open Ended Investment Companies) can provide a useful way of investing in stocks and shares while potentially limiting your risk, through pooling your money with other investors’.
Rather than buying stocks or shares directly, your money buys shares in the OEIC itself. This means the fund grows to reflect new investors like you buying shares, or shrinks when shares are sold.
Pooling your money into a single fund allows the OEIC to invest in a wide range of stocks and shares that wouldn’t be cost effective for most individual investors. A diverse portfolio spreads the risk so that if some shares perform badly, losses should be offset by stock held elsewhere.
What do equity OEICs invest in?
Equity OEICs buy shares in individual companies. They usually specialise in a particular market, defined either by geography (e.g. UK companies only), by type (e.g. start up companies) or by sector (e.g. energy).
The shares OEICs buy represent a stake or equity in those companies; meaning if the value of the company rises so too does the value of individual shares. Remember, because share value is related to demand, it can rise or fall at the drop of a hat.
This makes trading on the stock market a risky investment, and you can lose what you originally invested. However, this also means there is scope for very large profits.
Importantly, equity OEICs are professionally managed by traders whose knowledge of the stock market can help them profit from the large returns available – although this is by no means guaranteed.
Fees, charges and taxes
Unlike Unit Trusts, there is a single price for OEIC shares regardless of whether you’d like to buy or sell shares in a fund. Instead, OEICs tend to charge administration fees, typically around 5% of each new investment.
OEIC prices tend to be updated once a day, so you’ll usually be able to keep track of the latest equity OEIC share prices online. If you compare equity OEIC fund prices you can sometimes find funds that waive or discount this fee for an initial period.
Finally, Annual Management Charges (AMC) are charged by all OEICs, with the fee used to pay for the Fund Manager’s services. Annual charges are usually a little lower than account administration fees, often around 1.5% of your investment.
If you invest in an equity OEIC through an Investment ISA, any profit you make will be tax free which makes this a very efficient way of investing your money.
However, if you don’t use an ISA-wrapper, your profit through distributions (your portion of the share dividends earned by the fund) will be subject to income tax and if your shares in the fund rise in value then selling them will be subject to capital gains tax.
How to compare equity OEICs
The first thing to decide is whether there is a particular market, geographically or by sector, you’d like to invest in. Limiting your search by these criteria will save you from reviewing a lot of unsuitable funds.
Weighing up the amount of risk you are willing to be exposed to is also important before you invest. High risk markets such as start-up companies can offer potentially huge profits, but many new companies fail so there is similar potential for loss.
Equally, investing in well established UK based companies could be considered a less risky option that offers steady growth rather than potentially soaring profits.
Once you have considered these points, you can compare equity investment funds that meet your criteria for price, performance and fund manager, as well as each fund’s administrative and management charges to make sure you get the right investment for you.