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Unit Trusts/OEICs

Unit trusts and OEICs (open ended investment company) are collective investments, which allow individual investors to pool their funds with other investors by buying units or shares in the fund.

This shared arrangement allows individuals to invest in a wider selection of assets, spreading their investment and reducing their exposure to risk.

When investing in a unit trust or OEIC, money invested buys units/shares. Each unit trust or OEIC has thousands of people holding units/shares in the fund. Both unit trusts and OEICs are open-ended investments, as the number of units or shares held at any time will vary. As more investors join, more units/shares are created.

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Unit trusts and OEICs cover a variety of funds. The funds are grouped together in sectors, covering general principles of style, area and risk level in which the fund has chosen to invest.

These range from investing in a particular geographic area such as Europe or Japan to more specialised categories such as technology. Funds can also be split into two categories in terms of the way that they are managed - actively managed or passively managed.

• In an actively managed fund the fund manager is responsible for the selection of the shares within the portfolio.
• A passive fund is more regulated, with the fund following the performance of a particular index (e.g. the FTSE 100).

The value of the units may fall and rise depending upon the performance of the fund. Past performance is not always a guide to the future and increases are not guaranteed.

Unit trusts and OEICs are flexible and have no lock-in period, allowing for withdrawal at any time. However, they are generally seen as medium to long term investments that are expected to be held for at least five years.

Usually, unit trusts/OEICs are viewed as medium risk investments, although the exact risk level will depend on the type and fund selected.

Although unit trusts and OEICs are very similar, there is one main difference - the pricing structure. Unit trusts have two separate prices the unit price you pay when you buy into the fund (offer price) and the lower price at which you sell your units when leaving the fund (bid price), the difference between these two prices is known as the spread. OEICs have just one price for both buying and selling the fund.