1st July 2016

Expanding and contracting in response to demand

Open-Ended Investment Companies (OEICs) are stock market–quoted collective investment schemes. Like investment trusts and unit trusts, they invest in a variety of assets to generate a return for investors. They share certain similarities with both investment trusts and unit trusts, but there are also key differences.

Pooled collective investment vehicle

OEICs are a pooled collective investment vehicle in company form and were introduced as a more flexible alternative to established unit trusts. They may also have an umbrella fund structure, allowing for many sub funds with different investment objectives. This means you can invest for income and growth in the same umbrella fund, moving your money from one sub fund to another as your investment priorities or circumstances change.

By being ‘open ended’, OEICs can expand and contract in response to demand, just like unit trusts. The share price of an OEIC is the value of all the underlying investments divided by the number of shares in issue. As an open-ended fund, the fund gets bigger and more shares are created as more people invest. The fund shrinks and shares are cancelled as people withdraw their money.

Share allocation

You may invest into an OEIC through a Stocks & Shares Individual Savings Account (ISA). Each time you invest in an OEIC fund, you will be allocated a number of shares. You can choose either income or accumulation shares, depending on whether you are looking for your investment to grow or to provide you with income, providing they are available for the fund you want to invest in.

Like unit trusts, OEICs provide a mechanism for investing in a broad selection of shares, thus aiming to reduce the risks of investing in individual shares. Therefore, you have an opportunity to share in the growth potential of stock market investment. However, do remember that your capital is not secured and your income is not guaranteed.

Investment objectives

Each OEIC has its own investment objectives, and the fund manager has to invest to achieve these objectives. The fund manager will invest the money on behalf of the 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. The price of the shares is based on the value of the investments in which the company has invested.