OEICs offer a way to invest your money in a wide range of assets without the hassle of managing them yourself. This guide explains how to get started.
If you’re thinking about investing in OEICs, it’s important to understand exactly how they work. We explain all you need to know.
OEIC stands for Open Ended Investment Company. It is a type of investment fund that lets you combine your money with others to invest in a portfolio of shares, stocks and other assets.
This has the advantage that your money will be spread across several different investments, reducing the risk compared to investing in one place only.
Because OEICs are “open-ended”, the shares are issued each time someone invests. You can buy and sell shares as and when you wish, and the size of the fund will grow or shrink accordingly.
To choose the right OEIC for you, you’ll need to consider a number of different factors, such as:
Your attitude to risk: Consider how much risk are you willing to take with your investment. If you are risk-averse, look for OEICs that invest in less volatile markets such as bonds or blue-chip shares.
The sector you’re investing in: Look at where an OEIC will invest your money. Is this an area you have knowledge of? Is this a sector that is likely to grow in the future or struggle?
Whether you’re looking for income or growth: You should also think about what you want from your investment. You can choose to receive regular dividend pay-outs or reinvest your profits to maximise growth, so consider what would work best for you.
Whether you want to invest a lump sum or drip-feed money on a monthly basis: You can choose how you want to invest in an OEIC. You might want to invest a lump sum, or you might prefer to pay monthly deposits, depending on your financial situation.
Previous performance: It’s important to check how well an OEIC has performed in the past. Although you should never use past performance as an indicator of future returns, it will show you if the fund has been successful previously.
Try to find an OEIC that most closely matches your needs. Remember that there is no guarantee your investment will increase and you may not get back the full amount you invested.
There are three ways you can buy shares in OEICs:
Directly through a management company that offers the fund (e.g. Scottish Widows, Fidelity etc)
Through an independent financial adviser (IFA)
Through an online share dealing service or stockbroker
You can invest in an OEIC through a management company by:
Opening an account or registering with the company (you may need to complete an application form)
Choosing an OEIC you wish to invest in
Investing a lump sum, setting up regular payments, or both
You may need to pay an entry fee of around 3% - 5%, and an Annual Management Charge of between 1% and 2%.
Be aware that not all managers will accept direct investments, which means you will need to seek advice from a financial adviser instead.
Using an independent financial adviser (IFA) can be the better option if you’re not sure which funds to invest in. An IFA can help you choose which OEIC is best for you and will buy shares on your behalf.
However, while their professional advice may be valuable, keep in mind you will need to pay for their services.
This is a similar process to investing directly through a management company. You will need to sign up and open an account, deposit money into the account and then choose a fund to invest in.
The advantage, however, is that fees are typically lower compared with investing directly. You may be charged administration fees based on the total value of the OEIC, and an automatic reinvestment of income charge of around 1%.
You can choose to invest in an OEIC fund directly or through a stocks and shares ISA. The benefit of investing through an ISA is that your profits will not be subject to Income Tax or Capital Gains Tax.
The ISA allowance for the 2021/22 tax year is £20,000, which means you could invest this amount into an OEIC tax-free.
You will be able to view the share price of your OEIC through the fund manager's website, or the online service you invested through.
This should show you the price within the last day, and include charts of its performance over time.
If you have invested through an IFA, you can contact them for an update on how your OEIC is performing.
How you sell your shares will depend on how you invested.
If you bought your shares online either directly or through an online service, you should be able to log onto your account and sell your shares at their current price.
If you invested through an IFA, you will need to contact them to arrange the sale.
It’s unlikely that your fund manager will charge you an exit fee when you sell your shares, but always check to be sure. If you have invested through an online stock broker service check their fees for selling shares too.
As mentioned above, any profit you make when you sell will be subject to Income Tax and Capital Gains Tax, unless you have invested through a stocks and shares ISA.
To find out exactly how much tax you could be charged go to the GOV.UK website.
You can also use the UK Capital Gains Tax calculator.