What is an OEIC?

An OEIC is a type of fund that pools investors’ money and uses it to invest in companies, assets and/or commodities it believes will generate returns.

As the investment vehicle is a company, you’ll  buy shares in the OEIC.

It’s not the same as buying shares in an individual company, as the OEIC’s sole purpose is to invest in a diverse portfolio, potentially spanning everything from FTSE100 companies to properties to oil, to generate returns.

OEICs operate in a similar way to unit trusts, with the only difference being that OEICs issue shares rather than units.

Both are different to investment trusts which have a set number of shares they can issue.

OEICs can issue new shares and cancel them to accommodate an unlimited number of investors without diluting the value of your investment — hence the name ‘open ended’.

How do OEICs work?

OEICs work by putting all investors’ money into a collective pot, which gives the fund power to invest across a wide range of valuable assets.

While the actual investments will depend on your chosen OEIC’s risk level, this investment vehicle generally spreads your money across a diverse range of companies and assets.

If one business performs poorly, you’ll have lots of other investments to buoy the fund’s overall performance.

You can either use a DIY platform to invest in an OEIC that aligns with your financial goals, or let your financial adviser choose the right option.

You can also opt for a passive or actively managed OEIC.

Here are the key differences between the two:

Passive funds

Active funds

As with any investment, there are downsides to OEICs.

As with any fund that spreads your investments across companies and asset classes, past performance never guarantees your future returns.

The companies your OEIC has invested in could go bust or the assets could depreciate — even though the fund manager or company will have selected options that are likely to deliver as positive an outcome as possible.

How do I earn money from an OEIC?

If the investments within your chosen OEIC do well, you can generate income in one of two ways:

If you’re investing for the long term, you can either take dividends as income units or shares (and enjoy the money) or opt for accumulation.

This route automatically reinvests dividends into your chosen OEIC to boost your investment’s value.

What’s the difference between unit trusts and OEICs?

In terms of performance, unit trusts and OEICs have a similar purpose.

They both spread your money across a range of assets to deliver balanced returns.

Here are the main differences:

What are the rules around tax and OEICs?

Like all investments, you’ll need to pay tax on any returns you get from your chosen OEIC.

The main taxes UK taxpayers need to consider are:

If your investments are humble and generate income below the thresholds, you won’t have to pay tax.

But there is another, entirely legal, way to avoid getting taxed on your OEIC income, even if it’s above the tax thresholds…

Using an ISA to invest in OEICs

A stocks and shares ISA is a tax-efficient way to invest in OEICs and other types of funds.

Each provider will offer different products, but you’ll have to stick to the £20,000 annual ISA limit per tax year.

While an ISA can limit the amount you invest, there’s one huge benefit: any gains and income you receive within the ISA ‘wrapper’ are tax free, meaning you can save on dividend and capital gains tax.

If you don’t feel confident investing alone, an independent financial adviser can help you make the right decisions.

They’ll evaluate your appetite for risk and desired returns and help steer you towards investment options that make sense for your circumstances.

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