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OEICs - What are they?

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OEICs - What are they and when should they form part of your investment portfolio?

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      17.10.2001 01:02
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      Spelt differently but pronounced like a street urchin, an oeic is officially an open-ended investment company. It technically varies from a unit trust in that the investors are shareholders and own shares in the company that can be bought and sold but have no claim on the actual assets of the company. Unitholders on the other hand own a share of the entire pooled resources of a unit trust. An oeic is an incorporated company and is termed open ended, as the size of the fund will vary as investors buy and sell. Shareholders have the right to sell their shares back to the oeic on any dealing day, as can unit holders to their unit trust. Shareholders have a right to a share of any income that can either be paid out as dividends or reinvested. Similarly unit holders may either receive their income distributions or reinvest their income. There isn't an awful lot of difference that the average investor need concern themselves with, both are pooled, collective investments where you are entrusting professionals to get a better return than you could investing yourself in individual companies. Risk is spread across many markets and individual companies. The degree of risk and spread of shares will vary between funds which specialise in different markets eg UK, Far East, USA, Europe and different types of equity eg Technology, Healthcare, Smaller Companies, Growth , Income etc etc Dividends and distributions from oiec's and unit trusts are both subject to income tax, which can no longer be reclaimed by non-taxpayers, the funds themselves are exempt from capital gains tax, but the individual may be liable to capital gains when selling. Charges vary greatly depending on the fund, from nothing to 5% or more upfront, and then half or more percent every year. It is always worth buying funds through a discount broker, who will give you back most of the upfront charge in the form of extra investment or a cash back. oeic's like s
      hares, tend to have just one price at which you can buy or sell, unlike unit trusts where there is usually a wide bid and offer, buy and sell, spread. However one downside of both types of fund is you never quite know what price you will buy or sell at. They are forward priced ie you will always end up buying or selling at the next validation, which you won't know until it has been declared. All investments in equities are risky and your investment may well end being worth less than when you started. Over the long term, ie five to ten years, the chances are you will have done better than just sticking the money in a building society. You can be unlucky though and easily find yourself buying at the peak and selling at the bottom of the market. This opinion must NOT be taken as investment advice, I have absolutely no qualifications to give anyone financial advice.

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