Funds explained
Unit Trust or OEIC | Individual Savings Accounts (ISA) | PEPs (Personal Equity Plan)

Unit Trusts and Open Ended Investment Companies

Unit Trusts and OEICs (Open Ended Investment Companies) are pooled funds of investors' money, which are used to buy a range of shares, gilts, bonds or cash deposits. Both Unit Trusts and OEICs are open ended funds meaning that the size of each fund can vary according to supply and demand. Unit Trusts and OEICs provide a mechanism for investing in a broad selection of shares, thus reducing the risks of investing in individual shares. Typically, a Unit Trust or OEIC is worth anything from £5m to £300m.

When you invest in a Unit Trust you buy a unit, which means a portion of the total fund. OEICs issue shares. Each Unit Trust and OEIC has its own investment objective and the fund manager has to invest to achieve this objective. The fund manager will invest the money on behalf of the unit holders (or shareholders). The value of your investment will vary according to the total value of the fund, which is determined by the investments the fund manager makes with the fund's money. You can invest in a Unit Trust or OEIC through an ISA (Individual Savings Account). Usually, there are no additional charges for having an ISA, and you have the advantage of the investment being tax-free.

Unit Trusts and OEICs are pooled investments that provide investors with the ability to invest in a larger number of shares simultaneously, thus spreading their risk. Investors also benefit from expert management.

Unit Trusts and OEICs are separated into categories so they can be compared against other funds with similar objectives and underlying assets, for example, Japan Smaller Companies funds are grouped together.

Unit Trust or OEIC?

Unit Trusts and OEICs are both open ended collective investments and are subject to the same regulation. OEICs became available in May 1997 and were largely introduced as a more flexible and simplified alternative to the established industry of Unit Trusts.

An OEIC has an 'Umbrella' fund structure, allowing for many 'sub-funds' with different investment objectives. OEICs can also offer different share classes for the same fund. This enables private investors to invest alongside corporate investors in the same fund.

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Individual Savings Accounts (ISAs)

ISAs are tax efficient saving plans. They were launched in April 1999 for an initial ten-year period as the successor to PEPs (Personal Equity Plan) and TESSAs (Tax Exempt Special Savings Account), ISAs are not investments in themselves. Do not think ‘I’ve invested in an ISA’, instead think ‘I’ve invested in abc fund using an ISA wrapper’.

£7,200 can be invested in an ISA every tax year. It is advisable to identify products that have a record of good performance from the underlying investments and have low charges. A lump sum, a series of lump sums or a regular amount can be invested. The minimum amounts vary from company to company. In general, ISAs are not suitable for money you may need ready access to. Money can be easily withdrawn, but cannot be replaced if the full allowance has already been used. You should be prepared to commit yourself for three to five years or more. An investor can choose between a cash ISA and a stocks and shares ISA.

For more information on ISAs click here.

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PEPs no longer exist

As of 6 April 2008, all PEP accounts automatically became a stocks and shares ISA. You are now able to invest in this re-labelled PEP, which is now a stocks and shares ISA, as long as you haven’t subscribed to another stocks and shares ISA during the current tax year.

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