Independent Financial Advisors - IFA Bolton, UK

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Unit Trusts & OEICs

Unit Trusts, in outline exist so that unit holders' funds can be invested in a spread of securities managed by the investment managers, thus making the investment more convenient and less risky than a direct investment in a limited range of stocks and shares. Investment is generally made in specific geographical areas or types of companies, e.g., Europe, Japan, smaller companies and, gilt’s and fixed interest investments. Some aim to generate higher than average income; others are expected to generate longer-term growth, possibly with less income.

The price of units in a trust is usually calculated daily, and as with shares, the price of units (and the income from them) can go down as well as up. Two prices are usually quoted; offer price, this is the price at which units are bought and bid price, this is the price at which units are sold. The difference in these prices (as well as a small annual charge) is used to cover the running costs of the trust.

The minimum investment varies from trust to trust, but it is usually in the region of £500 with no maximum investment. Unit trusts do not have a minimum investment period. They are therefore very flexible in that they can be sold at any time without penalty. However unit trusts should be left to accumulate over a medium to long term period and certainly investment in a unit trust should not be considered if it were known the money would be required within five years.

Capital gains made on units in a unit trust are treated in the same way as gains made from shares, i.e. all growth is taxable at your highest marginal rate when a chargeable event occurs (e.g. on the encashment of the unit trust).

In addition everyone has an annual exemption limit for Capital Gains Tax each tax year, which means that gains can be realised free of tax up to the current years exemption limit.

Any dividend income produced by a unit trust is treated the same as a share dividend for income tax purposes, i.e. is taxable.

A lump sum investment into a unit trust allows you to participate in a large portfolio of shares giving you a highly diversified holding. Not only is direct investment of relatively small sums in shares likely to be relatively expensive, it would also put your investment at far greater risk than a unit trust. Additionally you will benefit from professional investment management, which provides two further benefits: specialist expertise that should achieve better performance and a reduction in the administrative burden.

Open-Ended Investment Companies (OEICs)

Open-Ended Investment Companies (OEICs) are a diversified collective investment vehicle similar to a unit trust but with a more transparent charging structure.

OEICs invest in shares of other companies and are managed in the same way as Unit Trusts, however, instead of buying units, the investor buys shares in the open-ended investment company.

The price of shares in an OEIC is usually calculated daily, and as with ordinary shares, the price of shares (and the income from them) can go down as well as up. As opposed to a Unit Trust, only one price is quoted, with separate initial and annual management charges being levied.
 
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