Learn everything you need to know about unit trusts and open-ended investment firms, along with helpful hints for selecting investment funds, in this guide.

What exactly is a mutual or investment fund?

Investment funds, also known as mutual funds in the United States, are collective investment plans that give you a stake in a ready-made portfolio by pooling your money with the money of other investors. In other words, investment funds are mutual funds.

Unit trusts and open-ended investment firms are two of the most common and widely used types of funds (OEICs).

Exchange traded funds are gaining more and more attention and are discussed in their own dedicated section here.

As our video illustrates, investing through a fund provides a number of benefits, including the elimination of the need to select individual shares and the facilitation of the creation of a diversified investment portfolio at an affordable cost.

What exactly is a unit trust?

A fund manager will purchase bonds or shares in companies on the stock market on behalf of the fund when the fund is managed through a unit trust.

The fund is broken up into units, and it is these units that you will be purchasing. The manager of the fund produces new units for new investors and cancels existing units for investors who are withdrawing their money from the fund. Because of the potential for an infinite number of unit creations, we refer to this type of fund as “open-ended.”

The net asset value (NAV) of the fund’s underlying investments is used to price each unit once a day, and the price of each unit is determined based on this NAV. This indicates that the value of the units you purchase directly reflects the value of the investment that lies under the surface.

What exactly is meant by the term “open-ended investment companies”?

OEICs function very similarly to unit trusts, with the key difference being that the fund in question is managed by a firm.

When investors enter and exit the fund, this results in the creation and cancellation of shares rather than units; yet, the value of these shares continues to directly reflect the value of the assets that your fund management has invested in.

Closed-end investment funds, which are more frequently known as investment trusts, are another type of investment vehicle that may be obtained.

Explain the difference between active and passive management.

If you decide to put your money into an investment fund, you will primarily come across the following two investment strategies:

 

Active management Managerial inaction (Tracker Funds)
Fund managers who are professionals choose which businesses to put their money into. Track an investing index
Aim to do better than the market average. Make an effort to imitate the market.
In general, more expensive prices In most cases, cheaper prices

Can rapidly choose and discard different firms

 

Must wait until the index is rebuilt in order to add or remove companies that are not currently included in it.

 

 

If your fund manager makes the correct decisions, an actively managed fund may be able to provide you the possibility of returns that are significantly higher than those offered by the market (or more protection from the adverse effects of a falling market).

However, there is no assurance that this will be the case, and the performance of passively managed funds tends to be superior to that of actively managed funds in the majority of circumstances.

Additionally, actively managed funds typically have much higher charges, which will have an effect on the returns you receive on your investments (see below).

Actively managed funds may be of particular interest to investors with an ethical or environmentally conscious mindset because managers have the ability to swiftly withdraw assets from companies embroiled in scandals.

It’s possible that passively managed funds won’t be able to invest until the index they track is reconstituted, even though this can happen rather often in certain circumstances.

How do returns get distributed for unit trusts and OEICs?

Distributions are the standard method by which returns on investments are paid out. Depending on the sort of fund that you invest in, these can take place on a monthly, quarterly, or even every six-monthly basis.

These distributions are derived from the dividend payments that the fund received from the underlying shares in which they invest, the interest payments that the fund received from bonds, or even the rental income that the fund earned in the case of property.

The majority of OEICs and unit trusts will provide you with two different payment choices from which to select.

There are two types of units that can be purchased: income units, which pay out the distributions as income, and accumulation units, which accumulate the payouts and reinvest them in the fund in order to grow the value of your investment.

Although it is feasible to transfer from accumulation funds to income funds or vice versa, doing so technically requires buying and selling funds, which could result in the payment of capital gains tax unless your investments are held in an individual savings account (Isa).

Where are investments for unit trusts and OEICs permitted to be made?

Investors in the UK have access to more than 2,000 distinct unit trusts and OEICs, which collectively invest in more than 30 different industries.

Using a variety of metrics, you are able to classify the ways in which funds invest:

Asset category

What the fund actually invests in; some will put their money into stocks and shares of companies, while others may put their money into bonds or commodities. When it comes to calculating the level of risk and volatility that a portfolio is exposed to, asset classes play a significant part.

The type of sector

Equity investment funds are able to speculate on the performance of a wide variety of firms, including the entire FTSE 100 index.

Alternately, it might make investments in particular industries, such as technology and telecommunications.

This is significant because certain events will have a positive impact on some industries while having a negative impact on others. For example, the COVID-19 pandemic had a positive impact on some technology businesses while having a negative impact on aeroplanes.

Geography

Because the economies of various countries are so varied from one another, the levels of risk that they provide for potential investors also vary greatly.

The United States of America, Canada, Japan, Australia, and New Zealand are all considered to be developed markets. On the other hand, other countries are considered to be emerging markets, which carry a greater risk but also have more potential for return.

Investment style

This also includes a number of other classifications, such as active vs passive.

The question of whether you want your capital to grow or whether you want to earn a regular income in the form of dividends is an illustration of the growth vs. income trade-off.

Which companies you choose to invest in will determine whether you prioritise growth or value. Growth companies are businesses that are expanding at a rapid rate, whereas value companies are traditionally robust businesses that are regarded as being undervalued.

Multi-manager funds

There is a type of mutual fund known as a multi-manager or fund of funds that invests in other mutual funds.

These funds do not put their money directly into individual assets; rather, they put their money into other types of collective investments with the assumption that the specialised managers of those other types of investments will deliver superior returns.

Inexperienced investors may benefit from investing in multi-manager funds because these funds eliminate a significant portion of the time that would otherwise be spent conducting research.

Certain multi-manager funds are structured to cater to investors with specific risk appetites.

What are the fees associated with investing in unit trusts and OEICs?

The majority of fund groups have almost completely abandoned startup charges at this point, and recurring fees have routinely been cut in half during the past few years.

An annual fund management charge of 0.75 percent is the new norm for actively managed funds, rising to approximately 0.85 percent when the additional expenses are added to make up the full ongoing charge figure (OCF), which replaces the old TER. In addition, an annual fund management charge of 0.75 percent is the new norm for passively managed funds.

In most circumstances, tracker funds continue to be far less expensive than index funds, with some index funds currently incurring ongoing fees of less than 0.1 percent.

Although they are relatively low, costs have been proven to be the factor that has the greatest negative impact on the performance of investment funds.

However, you are required to pay the fees even if your manager has returned a lower rate of return than the market or, even worse, has caused you to lose money.

Where can one buy unit trusts and other types of investment companies?

It is possible to make direct investments in certain funds; however, it is far simpler to purchase funds through an investment platform (also known as a fund supermarket) or with the guidance of a financial consultant.

You are eligible to invest through a stocks and shares Isa, Junior Isa, or Lifetime Isa if you use an investment platform, which protects you from paying taxes and, in the case of the Lifetime Isa, provides an additional advantage. Junior Isas are also available.