understanding financial jargon
A Unit Trust is a collective investment fund which invests in different companies and sectors on behalf of investors. Investors can freely buy and sell units in the fund, which grows or shrinks accordingly. However, the units issued cannot be traded between investors on the stock market, but are only sold and repurchased by the fund manager. Although similar to Open Ended Investment Company (or OEIC) funds, there are a number of differences.
Pricing: When buying a Unit Trust, the investor deals with a spread, where he/she buys at the offer price and sells at the lower bid price.
An OEIC fund has a single price. To make a return on unit trust investment the bid price must rise above the offer price at purchase before
the units are sold.
Complexity: In legal terms, unit trusts are much more complex than OEIC's, which has resulted in many unit trusts converting to OEIC's. Unit trusts entitle an investor to participate in the assets of the trust, without actually owning those assets, whereas investors in an Oeic buy shares in that investment company which owns the underlying assets. The ownership of unit trusts is divided into units. These rise and fall in value in line with the price performance of the fund's underlying assets.
Management: For unit trusts, the fund's assets are protected by an independent trustee and are managed by a fund manager, whereas OEIC's are protected by an independent depository and managed by an authorised corporate director.
Charges: Although both Unit Trusts and OEIC's have similar charge structures, with typical initial purchase charges of 3%-5%, and an annual management fee of between 0.5% and 1.5%, initial charges on Unit Trusts's are less transparent with no breakdown of what was charged compared to what was invested on your behalf. Most Unit Trusts can be bought via a fund supermarket to achieve discounts on charges.
Both Unit trusts and OEIC's are different from other types of investment companies such as Investment Trusts which trade on the stock market, where the number of shares in issue is largely fixed, and those shares can be traded as normal company shares.
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