Open-Ended
Investment Companies

Collective investment vehicles with a twist

Open-Ended Investment Companies (OEICs) are stock market-quoted collective investment schemes. Like investment trusts and unit trusts they invest in a variety of assets to generate a return for investors. They share certain similarities with both investment trusts and unit trusts but there are also key differences.

An OEIC, pronounced ‘oik,’ is a pooled collective investment vehicle, in company form. OEICs first became available in May 1997 and were introduced as a more flexible alternative to established unit trusts.

An OEIC may have an ‘umbrella’ fund structure, allowing for many ‘sub-funds’ with different investment objectives. This means you can invest for income and growth in the same umbrella fund, moving your money from one sub fund to another, as your investment priorities or circumstances change. Some OEIC providers allow you to do this without charge as you stay within the same share class (with the same charging structure). OEICs may also offer different share classes for the same fund.
You may invest into an OEIC through a stocks and shares Individual Savings Account (ISA). Each time you invest in an OEIC fund, you will be allocated a number of shares. You can choose either income or accumulation shares, depending on whether you are looking for your investment to grow or to provide you with income, providing they are available for the fund you want to invest in.

Like unit trusts, OEICs provide a mechanism of investing in a broad selection of shares, thus aiming to reduce the risks of investing in individual shares.

Therefore, you have an opportunity to share in the growth potential of stock market investment. However, do remember that your capital is not secured and your income is not guaranteed.

You have access to your investment when required, although you should regard investing in an OEIC as a medium to long term investment. You may invest a lump sum make regular monthly payments. Through the OEIC structure there is the flexibility to switch easily between the investment funds provided by your OEIC manager.
OEIC shares are bought and sold at a single price. All charges, such as the initial charge, are shown separately, making it easier to understand exactly what costs are involved.

Funds with low or no initial charges may have a penalty exit fee for short term investors. This is to encourage people to keep their investment in the fund; the charges decrease the longer the time invested. Most funds have different charges for each share class.

Your tax situation will depend on the type of distribution you receive, which in turn will depend on the type of OEIC you have invested in. If you have invested in an OEIC via a stocks and shares ISA, you will not have to pay any further tax. Income from investments held within ISAs does not have to be declared on your tax return.
If you are holding an OEIC investment outside an ISA and you receive a distribution, you will receive a tax voucher from the fund manager showing both the amount that you are getting and the amount of tax on the distribution that has been paid by the manager.
OEIC funds invested in gilts, loan stocks and other interest-bearing investments pay out interest distributions. Outside an ISA, you will receive these distributions net of 20 per cent tax. You cannot register to have the interest paid gross but, if you are a non-taxpayer, you can reclaim any tax overpaid. Dividend distributions are paid net of 10 per cent tax.

How much, if any, tax you will then have to pay will depend on your status, non-taxpayers may reclaim tax paid on interest but not on dividends, basic rate taxpayers will have no further tax to pay but higher rate taxpayers will face a further tax bill.

On the sale of your investment in an OEIC there may also be a Capital Gains Tax liability. Subject to the annual exemption, £9,600 for the 2008/09 tax year the gain will be taxed at 18 per cent. Any OEIC investment held within an ISA would be sheltered from any further tax liability and there would be no tax to pay on disposal.
Each OEIC has its own investment objective and the fund manager has to invest to achieve this objective. The fund manager will invest the money on behalf of the shareholders.

The value of your investment will vary according to the total value of the fund, which is determined by the investments the fund manager makes with the fund’s money. The price of the shares is based on the value of the investments the company has invested in.
Investment Trusts sometimes see their shares trade at a discount to the underlying value of the assets they hold. However, OEICs cannot fall to a discount. They always trade at a true ‘net asset value’ (NAV).

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.