A guide to unit trusts

What they are

Investment funds known as unit trusts or open ended investment companies (oeics) are managed portfolios that usually include just shares but can also include bonds, gilts and cash.

You buy a unit, or share in the case of oeics, in the fund and that reflects the value of the underlying portfolio. As the value of that basket or portfolio rises or falls, so the value of the unit or share rises or falls.

The difference between unit trusts and oeics

A unit trust has two prices: a buying or "offer" price, and a selling or "bid" price. The difference between these two prices reflects the spread on the underlying market between buying and selling prices, usually between one percent and five percent, depending on the market.

An oeic, however, is a company that issues shares and these shares have one price, a "mid" price, which as it implies, is roughly mid way between the buying and selling price on the market.

These funds are similar, despite their differences, in fact most oeics have been formed from unit trust conversions, and they are to be found being measured against each other in performance league tables.

What they do

Investment themes of these funds cover everything from an entire stock market, or even markets across the world, through to highly specialised funds investing in one country, one sector, such as technology, or smaller companies.

Most of them are managed actively, with the fund manager picking companies or markets to invest in. But the most rapidly growing sector is of "tracker" or "indexed" fund that follows the movement of a particular market index. Because these funds are not actively managed, they are amongst the cheapest to buy.

Arguments rage over which is the best type of fund to buy, as tracker fund managers point out that so few actively managed funds ever manage the beat the index on which they are based.

What they cost

Managed unit trust/oeics will usually have both an initial charge of up to five percent and an annual charge of between 0.5 percent and 2.5 percent. Some have an exit charge, with up to five percent being taken if you disinvest within one year, down to one percent if you disinvest in the fifth year and zero percent thereafter. Trackers, however, will tend to charge between zero percent and three percent initial and around 0.5 percent annually.