OEICS

OEICs or investment trusts are companies that pool investors' money and use expert fund managers to invest in equities and bonds. Unit trusts and OEICs are by far the most popular investment funds. With a unit trust, a fund manager buys bonds or shares in companies on the stock market on behalf of the fund.

The fund is split into units, and this is what you’ll buy. The fund manager creates units for new investors and cancels units for those selling out of the fund. The creation of units can be unlimited, hence why the fund is ‘open-ended.’

The price of each unit depends on the net asset value (NAV) of the fund’s underlying investments and is priced once per day. This means that the value of the units you buy directly reflects the underlying value of the investment.

OEICs operate in a similar way to unit trusts except that the fund is actually run as a company. It therefore creates and cancels shares rather than units when investors come in and go out of the fund, but they still directly reflect the value of the assets that your fund manager has invested in.

Returns from funds are typically paid through distributions. These can be monthly, quarterly or every six months, depending on the type of fund that you invest in.

These distributions derive from the dividend payments received by the fund from the underlying shares within which they invest, or interest payments from bonds or even rental income in the case of property.

Most unit trusts and OEICs will give you two options to choose from for payment – income or accumulation. Income units pay the distributions as income, while accumulation units wrap up those distributions and reinvest them in the fund, to increase the capital value of your investment.

While income payments, or the compounding of income within a fund through accumulation units, is often a major attraction for fund investors, most will also be looking for some capital growth in the long term. So fund managers will also invest with a view to growing the value of their assets over time, sometimes more aggressively in the case of growth funds.