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.
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Open-ended investment funds
Acting in the investors’ best interests at all times
Open-ended investment funds are often called collective investment schemes and are run by fund management companies. There are many different types of fund.
Pooled investment schemes
Investing in one or more asset classes
Investing in funds provide a simple and effective method of diversification. Because your money is pooled together with that of other investors each fund is large enough to diversify across hundreds and even thousands of individual companies and assets. A pooled (or collective) investment is a fund into which many people put their money, which is then invested in one or more asset classes by a fund manager.
Fund focus
Are you investing for growth, income or both?
You should consider whether you are primarily investing for growth, income or both. If you want some income, but no risk to your capital, you could choose a money market or cash fund, which means a professional investor will be working to get the best available interest rates.
Smoothing out your portfolio’s returns
Increasing the long-term value of your investments
In the light of recent market volatility, it’s perhaps natural to be looking for ways to smooth out your portfolio’s returns going forward. Investing regularly can smooth out market highs and lows over time. In a fluctuating market, a strategy known as pound cost averaging can help smooth out the effect of market changes on the value of your investment and is one way to achieve some peace of mind through this simple, time-tested method for controlling risk over time.
Diversification
Don’t put all your eggs in one basket
When deciding whether to invest, it is important that any investment vehicle matches your feelings and preferences in relation to investment risk and return. Hence your asset allocation needs to be commensurate with your attitude to risk. Another key question to ask yourself is: ‘How comfortable would I be facing a short-term loss in order to have the opportunity to make long-term gains?’ If your answer is that you are not prepared to take any risk whatsoever, then investing in the stock market is not for you.
Investment goals
What do you want to achieve from your investments?
You may find your investment goals change if you get married, have children, or start a business, so it could be an idea to switch your investments into different funds. And as you approach retirement, you may want to move your money gradually into investments that offer more security.
A new flexible friend
Withdrawing as little or as much income from your pension fund as you wish
Generating a retirement income has now become even more flexible. From 6 April, new rules were introduced to replace the previous pension drawdown arrangement which have now provided investors with greater flexibility and control over their pension options when they retire.
The new kid on the block
Pooling your money with thousands of other people
British collective investment funds that pool money from lots of investors go back to 1868. The first funds were investment companies – listed companies that offer shares to investors and then buy shares in other companies with the monies they collect in. Just like fully functioning companies, investment companies have boards of directors to oversee the managers’ efforts, shareholders with voting rights, and reports and accounts.
Junior savers
Avoiding the inflationary risk which comes with cash investments
The merits of the new Junior Individual Savings Account (ISA) are clear according to Fidelity Worldwide Investments but where to invest the allowance needs consideration. With the current low interest-rate environment many savers who would have not contemplated investing in funds may now decide to do so in order to avoid the inflationary risk which comes with cash investments.