OEIC (Open-Ended Investment Companies)

Open-ended investment funds are often called collective investment schemes and are run by fund management companies. There are many different types of fund including unit trusts, OEICs (Open-Ended Investment Companies (which are the same as ICVCs – Investment Companies with Variable Capital), SICAV (Société d'investissement à capital variable) and FCPs (Fonds communs de placement). The above list includes certain European funds called UCITS schemes which are permitted under European legislation to be sold in the UK.
There are many funds to choose from - some valued at many millions of pounds. They are called open ended as the number of units/shares in issue increases as more people invest and decreases as people take their money out.
As an investor, you buy units/shares in the hope that the value rises over time as the prices of the underlying investments increase. The price of the units/shares depends on how the underlying investments perform.
You might also get income from your units/shares through dividends paid by the shares (or income from the bonds, property or cash) that the fund has invested in.
You can either invest a lump sum or save regularly each month. You can buy funds directly from the investment management company or through a financial adviser, a stockbroker, private client investment manager or fund supermarket – see Related links. Most firms will publish daily the price of units/shares in newspapers or online.
Investment Managers Authority collects and publishes monthly and quarterly statistics for UK open-ended investment funds on their website. You can also view fund management companies by the size of the funds they manage – see Related links.

Risk

Open-ended investment funds generally invest in one or more of the four asset classes – shares, bonds, property and cash. Most invest primarily in shares but a wide range also invests in bonds. Few invest principally in property or cash deposits. Some funds will spread the investment and have, for example, some in shares and some in bonds. This can be useful if you are only taking out one investment and – remembering that asset allocation is the key to successful investment – you want to spread your investment across different asset classes.
The level of risk will depend on the underlying investments and how well diversified the open-ended investment fund – see asset classes and diversification. For example, a fund which invests only in one industrial sector, such as technology, will invariably be more risky than funds that invest across the whole range of companies in a market. Similarly funds are grouped in categories, such as UK Equity or Gilt and Fixed Interest, to make your selection process easier.
Some funds might also invest in derivatives, which may make a fund more risky. However, fund managers often buy derivatives to help counterbalance or cancel out the risk involved in owning assets or in holding assets valued in other currencies.
Your money in an open-ended investment fund is protected by a trustee or depository who ensures the management company is acting in the investors' best interests at all times.

Charges

When you buy units/shares in a fund, you usually pay an initial charge. How the charge is shown depends on how the price is worked out.
For some funds, you buy units at the offer price and sell them at the bid price. The bid price is lower than the offer price and the difference is called the bid/offer spread. These funds are referred to as being dual-priced. The initial charge is usually part of the bid/offer spread, which can often be around 5% – so effectively 5% of your investment is taken in charges at the outset. Some funds have no initial charge, but there may be an exit charge instead when you withdraw your money by selling units.
For many funds, there is no difference between the buying and selling price of units. Because of this, the funds are referred to as being single-priced. If there is an initial charge, it is added to the single price when you buy units, and there may also be an exit charge when you sell units. Between them, these charges are likely to represent around 5% of your investment, so you may end up paying the same level of charges in a single-priced fund as in a dual-priced fund.
The fund management company takes an annual management charge directly from the investment fund. There are also other costs – buying and selling within the fund, custodian fees etc. These costs, along with the annual management fee, are called the total expense ratio (TER). The TER is therefore an estimate of the total ongoing costs of the investment.

Tax

For income, there is a difference in the tax position between funds investing in shares and those investing in bonds, property and cash.

• Income (dividends) paid by shares within an open-ended investment fund is assumed to be paid after taking 10% tax (the tax credit). These dividends, when paid out of the fund to you, are not subject to any tax if you are a basic rate, lower rate, or non-taxpayer. If you are a higher rate taxpayer then you have an overall tax rate on dividends of 32.5% of the gross dividend (but you can deduct the 10% tax credit). Non-taxpayers cannot reclaim this 10% tax credit.
• Income paid by bonds, property or cash within an open-ended investment fund is paid net of 20% tax. For funds investing principally in these asset classes, no further tax is due if you are a basic rate, lower rate, or non-taxpayer. If you are a higher rate taxpayer then you will have to pay an additional 20% tax. However, unlike funds investing in shares, if you are a non-taxpayer (or lower rate taxpayer) then you can reclaim the appropriate amount of tax paid.

Whichever type of open-ended investment fund you have, you can reinvest the income to provide additional capital growth, but the taxation implications are as if you had received the dividend income.
No capital gains tax (CGT) is paid on the gains made on investments held within the fund. But, when you sell, you may have to pay capital gains tax. However, bearing in mind that taper relief and the personal CGT allowance (£9,200 for the 2007/08 tax year per individual) is available, it is often possible to avoid all capital gains tax.
Please note that this is only a summary of the tax position at April 2007. You should be aware that tax legislation changes constantly and you should find out the most current position.