Open-ended Investment company (OEIC)

Instead of buying and selling individual investments yourself, it can be easier and more cost-effective to invest in the markets through an Open-Ended Investment Company (OEIC).

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 can be set up as a single company or as a company with several sub-funds, known as an umbrella scheme. Each sub-fund within the umbrella scheme has its own investment policy and objective.

How do OEICs work?

When you invest in an OEIC you buy shares in the company. The total number of these shares changes over time as they are bought and sold.

Your money is then combined with other investors’ and invested in a selection of stocks, shares and other assets by the fund manager. This is known as the fund’s investment portfolio.

Pooling your money with other investors gives the fund manager more buying power to make larger and more diverse investments than you could make on your own. This reduces risk by spreading the money across a number of different investments.

The value of an OEIC fund is linked to the performance of its portfolio: when the value increases, the value of your shares grow too, and the same applies if the value goes down.

What does ‘Open Ended’ mean?

OEICs are “Open Ended”, which means shares are issued each time someone invests and you can buy or sell shares whenever you want. The size of the fund will grow or shrink to mirror this.

How do OEICs make you money?

The value of your shares will increase when the value of the underlying assets in the OEIC rise, and decrease when they fall. Some OEICs give you the option of buying income shares or accumulation shares:

• Income shares make a regular payout of any dividends the fund earns. This type of share is not offered by every OEIC and may not be available if you choose to invest on a monthly basis.
• Accumulation shares automatically reinvest in the fund until you decide to cash in. This option is designed for long term growth.

Most OEICs let you sell your shares at any time but some may only allow sale at certain times of the year so check this before you invest.

Most OEICs are designed for medium to long term investment of between 5 and 10 years. Exactly how long you invest for will depend on your financial goals and the success of the fund.

What are the risks?

The main risk is that the value of the OEIC could decrease.

Although OEICs attempt to manage risk by investing in a diverse portfolio and calling on the experience of professional fund managers, there is always a chance your investment could devalue.

You can manage the risk by choosing a fund that invests in established sectors and companies rather than riskier markets.

Bear in mind you will be charged fees so the growth of the OEIC will need to cover these otherwise they will eat into the money you have invested.

Is an OEIC right for you?

Whether an OEIC is the right choice for you is down to your situation and preference. Consider:

• How risk adverse you are?
• How long you have to invest?
• How much you have to invest?

Make sure you fully understand the risks involved before you invest. It is worth seeking professional advice before you make any investment decisions. why not get in touch with us and arrange a free consultation today with one of our expert advisers