Funds: unit trusts and OEICs

Pooled investing, how the structures differ, and the handful of things actually worth checking.

A fund pools money from many investors and buys a portfolio of holdings. You own units or shares in the fund rather than the underlying investments directly.

For most people, funds are the sensible way to invest. One purchase gets you exposure to hundreds of companies across multiple countries, which would be impractical and expensive to build yourself.

The structures

Unit trusts and OEICs (open-ended investment companies, sometimes called ICVCs) are the two UK structures. The legal mechanics differ — a trust with a trustee versus a company with an authorised corporate director — but from an investor's point of view they behave almost identically.

Both are open-ended: the fund creates new units when people invest and cancels them when people sell. The price always reflects the value of the underlying holdings, so you never pay more or less than the assets are worth.

That's the key difference from investment trusts, which are closed-ended and can trade above or below their asset value — see ETFs and investment trusts.

Accumulation or income units

Most funds offer both, and the choice matters more than people expect.

Income units pay dividends out to you as cash.

Accumulation units reinvest the income automatically inside the fund.

For long-term growth, accumulation units are usually simpler — the reinvestment happens without you needing to do anything. For someone drawing an income, income units make the cash flow visible.

One trap: in a taxable general investment account, the income within accumulation units is still taxable even though you never received it, and it also increases your base cost for capital gains purposes. People routinely get this wrong and either overpay or underpay. Inside an ISA or pension it doesn't arise.

Multi-asset and risk-targeted funds

A single fund holding a diversified mix of shares, bonds and other assets, usually offered as a range from cautious to adventurous.

These are genuinely the right answer for a lot of people. One holding, professionally rebalanced, diversified across asset classes, with a risk level you choose. It removes the need to build and maintain an allocation yourself — see Building a portfolio.

The trade-off is a slightly higher charge than assembling the components yourself, and less control over the detail. For most investors that's a good trade.

What's actually worth checking

The charge. The ongoing charges figure, and what else sits on top. Covered properly in What you actually pay.

What it actually holds. The name tells you less than the factsheet. Read the top ten holdings and the geographic split — plenty of "global" funds are largely US technology, and plenty of "income" funds are concentrated in a handful of sectors.

The objective and benchmark. What is it trying to do, and against what.

Size. Very small funds can close or merge, which forces a disposal at a time not of your choosing.

How it fits what you already hold. Two funds with different names frequently own the same companies. Buying five global funds isn't diversification, it's the same portfolio five times with five sets of charges.

What's worth less attention

Past performance, particularly short-term. The relationship between recent strong performance and future strong performance is weak, and chasing last year's winner is one of the most reliable ways to buy high.

Star ratings and awards. Backward-looking by construction.

The manager's name, unless you're specifically buying an active strategy and understand what happens if they leave.

This article is for general education only and isn't personal advice or a recommendation of any fund.