Types of investment
Collective Investments
These allow investors to participate in a large portfolio of stock and shares and other assets with many other investors. This enables them to access a wider spread of investments at a lower cost than would otherwise be available. Investments such as these allow you to utilise your Capital Gains Tax allowance and any income generated will be subject to income tax, (except when in an ISA or Pension Plan).
Unit Trusts
Unit Trusts are collective investments that are subject to certain rules. The managers of the investment fund have to set out the investment objectives and trustees oversee their activity to ensure that the objectives are met. The number of companies in whom investments are made has to be at least 20 but the trust cannot hold more than a certain share capital in any one company. This ensures that there is a certain safeguard on the spread of investments. The investor buys units at the ‘offer’ price and sells them back to the fund managers at a ‘bid’ price. The difference between the two includes an initial charge and is known as the bid/offer spread. An annual management charge is also applied and the amount depends on the type of fund.
Investment Trusts
An Investment Trust is a company whose sole business is to manage the investments it owns. The management of an investment trust may be employees of the trust (in which case it is called a self-managed trust) or, more commonly, may be an external fund management company.
The use of the term trust is slightly misleading as (unlike Unit Trusts) there is no trustee involved. It reflects the historical origins of investment trusts.
The shares of investment trusts are listed and therefore they are bought and sold through a broker, like the shares of any listed company. There is usually an annual management charge paid out of the investment trust's assets. Investment trusts are ‘closed ended’ so the amount of money in the fund does not change; investors cannot withdraw money from an investment trust, or add to the money in the trust: they buy or sell its shares.
Open Ended Investment Company (OEIC)
Open ended investment companies (OEICs) are a form of collective investment fund. OEICs are legally similar to investment trusts in that they are companies whose sole business is to manage the investments they own. However, OEICs operate more like unit trusts in that investors buy and sell shares in the OEIC from and to the OEIC manager rather than on the open market. This is possible as an OEIC can freely cancel existing shares (when an investor sells) or buy new shares (when an investor buys).
As with unit trusts, there may be initial charges and exit charges. However OEICS, unlike unit trusts, are generally single priced. As with any type of fund there will be an annual management fee.
Investment Bonds
These are single premium, whole of life insurance contracts, where the level of life cover is very little more than or equal to the value of the investment. These are similar to OEICs but, because of the insurance link, they are treated differently for tax purposes. Currently, withdrawals of up to 5% of the original investment each year are treated as return of capital and not subject to tax at that time. Income tax might be due when more than this is encashed and will depend on your tax situation at the time. Your financial adviser can guide you through this.
