Unit trusts and open ended investment companies (OEICs) are forms of shared investments, or funds that allow you to pool your money with thousands of other people and invest in world stock markets.

Unit Trusts have proved incredibly popular because your money is invested in a broad spread of shares and your risk is reduced. But they’re gradually being replaced by their modern equivalent, the OEIC fund.

OEICs were first sold to UK investors in 1997. The FSA’s rules governing which types of fund can convert to OEICs were relaxed in 2001 and since then, the majority of fund management groups have converted their unit trusts to OEICs or launched these funds.

You can invest in a unit trusts and OEICs with as little as £25 a month or a £500 lump sum, which means it can be a relatively painless way to get a foothold in the stock market. Typically you will pay an initial charge of 5% to 6% and an annual management charge of between 1% and 1.75%.

The Differences

Unit trusts and OEICs are both open-ended investments, which means that investors can freely buy and sell shares in the fund, which then grows or shrinks accordingly. It means the value of the shares you own in an OEIC, or units in a unit trust, always reflects the value of the fund’s assets.

But there are a few key differences…

Pricing

When investing in unit trusts, you buy units at the offer price and sell at the lower bid price. The difference in the two prices is known as the spread. To make a return on your investment the bid price must rise above the offer before you sell the units.

An OEIC fund has a single price, directly linked to the value of the fund’s underlying investments. All shares are bought and sold at this single price, so there is no need to calculate the spread. The OEIC has been described as a ‘what you see is what you get product’.

Flexibility

An OEIC fund can offer different types of share or sub fund to suit different types of investor, so private individuals can invest in the same funds as large institutions and pension fund managers.

The expertise of different fund management teams can be combined to benefit both large and small investors, while streamlining the administration and management costs of the fund.

Clients receive less paperwork, as each OEIC will produce one report and accounts for all sub funds, instead of separate reports for each fund.

Complexity

In legal terms, unit trusts are much more complex. In fact, this is the main reason for their rapid conversion to OEICs. Unit trusts entitle an investor to participate in the assets of the trust, without actually owning those assets. Investors in an OEIC, meanwhile, buy shares in that investment company.

The ownership of unit trusts is divided into units. These rise and fall in value in line with the share price performance of the fund’s underlying assets.

Management

With unit trusts, the fund’s assets are protected by an independent trustee and are managed by a fund manager. OEICs are protected by an independent depository and managed by an authorised corporate director.

Charges

Unit trusts and OEICs usually have an up-front buying charge, typically 3%-5%, and an annual management fee of between 0.5% and 1.5%. It is possible to reduce these charges by investing through a discount broker or fund supermarket, but this means acting without financial advice.

Charges on OEICs are pretty transparent. Any initial charge is shown as a separate item on your transaction statement – so the whole transaction is clear and easy to understand.