What Is an Open-Ended Investment Company (OEIC)? How They Work (2024)

FAQs

What Is an Open-Ended Investment Company (OEIC)? How They Work? ›

An OEIC is a collective investment scheme, or managed fund, in which the money of many investors is pooled together to purchase investments in a range of different assets, according to the investment policy of the managed fund.

An OEIC is a collective investment scheme, or managed fund, in which the money of many investors is pooled together to purchase investments in a range of different assets, according to the investment policy of the managed fund.

An open-ended investment company pools investors' money and spreads it across a wide range of investments, such as equities or fixed-interest securities. This diversification helps reduce the risk of losing an investor's principal.

An open-end fund issues shares as long as buyers want them. It is always open to investment—hence, the name, open-end fund. Purchasing shares cause the fund to create new—replacement—shares, whereas selling shares takes them out of circulation. Shares are bought and sold on demand at their NAV.

There are three parties to an OEIC: the Authorised Corporate Director (ACD) - who operates the company scheme and is responsible for investing cash contributions received from investors; the trustee who must not be connected with the ACD and who is entrusted with the custody of the investments held within the OEIC; and ...

An investment trust at its simplest is just another type of fund, like a unit trust or Open-ended Investment Company (OEIC), in that it's a type of pooled investment. However unlike unit trusts and OEICs, an investment trust is a quoted company and listed on the Stock Exchange.

OEICs and unit trusts are categorised as funds, so you pay a 0.2% annual customer fee and a £3 online transaction fee (telephone transactions cost £25). For an ETF, you pay a 0.1% annual customer fee and £6 online transaction fee. These fees are charged monthly to help spread costs for investors.

Examples of open-end funds include traditional mutual funds, hedge funds and exchange-traded funds (ETFs), which are funds that trade on an exchange like a stock.

Open-end funds are traded at times dictated by fund managers during the day. There is no limit to how many shares an open-end fund can offer, meaning shares are unlimited. Shares will be issued as long as there's an appetite for the fund. So when investors buy new shares, the fund company creates new, replacement ones.

An open-end investment company makes a continuous offering of its shares that are redeemable. An open-end investment company is the technical term for a mutual fund.

What are the risks of open-end funds? ›

High Volatility

Hence, open ended funds are prone to market risks and highly volatile in nature. While the fund manager endeavors to contain the volatility by diversifying his investments, these funds carry a certain degree of market risks at all times.

The key feature of open-ended funds is liquidity. Moreover, these funds do not have any fixed maturity period. Investors can conveniently purchase and sell units at the Net Asset Value (NAV), which is declared daily.

Unit trusts and OEICs are the most popular type of fund but can come with high costs The risk of directly investing in shares (or bonds or property) is that if the share price drops in value, or the issuing company goes bust, you could lose money.

An OEIC pools your money with other investors with the potential you could boost your purchasing power. This means you are able to invest in some assets such as shares, fixed interest and property, that, as an individual investor, you could not normally invest in, or you might find expensive to do on your own.

The major difference is that unit trusts quote a bid price (to redeem) and an offer price (when you buy) with a spread that aims to ensure new or redeeming investors don't dilute the value of existing investors' units; OEICs only quote one price.

OEICs are open-ended; the fund is equitably divided into shares which vary in price in direct proportion to the variation in value of the fund's net asset value.

An income class unit or OEIC share gives the holder a right to receive regular income from a fund which represents the dividends paid to the fund from companies in which the fund holds securities.

OEICs operate in a similar way to unit trusts, with the only difference being that OEICs issue shares rather than units. Both are different to investment trusts which have a set number of shares they can issue.

In unit trusts, the initial fee, often around 5 per cent, was the spread between the bid and offer prices on the day of purchase and with just one price OEICs simply charged a percentage of the overall investment.

OEICs are listed on the London Stock Exchange and investors buy shares in the company. Those shares are valued based on the underlying assets of the OEIC.

Why is unit trust better than ETF? ›

ETFs typically aim to replicate indices and are passively managed, while unit trusts generally aim to outperform indices and are actively managed. Given that markets can be dynamic and unpredictable, there are times when ETFs outperform unit trusts and unit trusts outperform ETFs.

While open-ended funds are not allowed to borrow money, investment trusts can borrow money to invest alongside the money pooled by investors. The process of 'gearing' allows the investment trust manager to take advantage of market opportunities quickly.

A mutual fund is an open-end investment company or fund. An open-end fund is one of three basic types of investment companies. The other two types of investment companies are closed-end funds and unit investment trusts (UITs).

The fund is managed by a professional investment company, such as a mutual fund or investment management firm, which is responsible for investing the fund's assets according to its investment objective.

Trading – In an open-end mutual fund, shares can be bought and sold at the end of each day at the fund's closing NAV, whereas closed-end funds trade based on supply and demand throughout the day and can trade at either a premium or discount to the fund's NAV.

No fixed term: The defining feature of an open-ended fund is that it does not have a fixed term, meaning there is no specific date upon which the fund or any of its investments must be liquidated.

An open-end fund generally must sell and redeem its shares at a price based on the fund's current net asset value as next computed after the receipt of a redemption, purchase or sale order.

The primary difference between an open-end and closed-end investment company is: The capitalization. Open-end companies issue common stock only, while closed-end companies issue common and preferred stocks and bonds.

One of the largest closed-end funds is the Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG). Founded in 2007, it had a market cap of $2.5 billion as of June 2022. 2 The primary investment objective is to provide current income and gains, with a secondary objective of capital appreciation.

Taxation for Open ended Mutual Funds

It is treated as an equity fund for tax purposes if the fund invests 65% of its total assets or more in equity and equity-related instruments. Whereas it is treated as a debt fund for tax purposes if the fund invests at least 65% of its total assets in debt instruments.

Why would anybody want to invest in a closed-end fund? ›

A closed-end fund (CEF) is an investment option that could appeal to those looking for the potential for high returns and who are comfortable with sustaining large losses. Someone who has a lower risk tolerance may want to opt for investments that are less volatile and more liquid.

The first closed-end funds were introduced in the U.S. in 1893, more than 30 years before the first open-end funds. Despite their head start, closed-end funds are less popular because they tend to be less liquid and more volatile than open-ended funds.

Open ended funds typically pay out dividends to investors, a number of commentators point out. Christine Cantrell, sales director at BMO GAM, says: “Open-ended funds typically distribute the dividends they collect from their equities, the coupons from their bonds or the rental income from the property they own.”

These funds are usually not traded on stock exchanges. The big difference between open ended and closed ended mutual funds is that open-ended funds always offer high liquidity compared to close ended funds where liquidity is available only after the specified lock-in period or at the fund maturity.

An example of an Open-Ended Investment Company (OEIC) is the Vanguard FTSE 100 Index Fund. This fund invests in the 100 largest companies listed on the London Stock Exchange, represented by the FTSE 100 Index.

A unit trust is a type of mutual fund where money from many investors (called “unit holders”), is managed by a fund manager to achieve a specific return. This fund manager then creates a portfolio of investments and assets.

The major difference is that unit trusts quote a bid price (to redeem) and an offer price (when you buy) with a spread that aims to ensure new or redeeming investors don't dilute the value of existing investors' units; OEICs only quote one price.

Example of Investment Trust

Some of the top investment trusts funds available across the globe: Scottish Mortgage Investment Trust Plc: Launched on 01 Jan 1909, the fund is managed by Baillie Gifford & Co Limited and is domiciled in the UK.

A common trust fund is an investment vehicle established by a bank in the form of a state-law trust to handle the investment and reinvestment of money contributed to it in its capacity as a trustee, executor, administrator, guardian, or as a custodian of a Uniform Gifts to Minors account ( Code Sec. 584).

What are the disadvantages of unit trust? ›

You can make or lose money in unit trust funds, but the risk of losing money depends on where and how the fund invests. Generally the longer you can stay invested, the more likely you are to enjoy a good investment return. A unit trust fund is made up of equal portions called units.

A unit trust fund can earn income from the underlying assets that it holds. This income is referred to as “distributable income” (since it is distributed to unitholders). It consists of interest and/or REIT income and/or dividends, depending on the underlying holdings.

Bonds, stocks, mutual funds and exchange-traded funds, or ETFs, are four basic types of investment options.

Perhaps the most common are stocks, bonds, real estate, and ETFs/mutual funds. Other types of investments to consider are real estate, CDs, annuities, cryptocurrencies, commodities, collectibles, and precious metals.

OEICs work by putting all investors' money into a collective pot, which gives the fund power to invest across a wide range of valuable assets. While the actual investments will depend on your chosen OEIC's risk level, this investment vehicle generally spreads your money across a diverse range of companies and assets.