Open-ended investment funds

Acting in the investorsí 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. These include:

Unit trusts
– OEICs (Open-Ended Investment Companies, which are the same as ICVCs
– Investment Companies with Variable Capital)
– SICAV (SociÈtÈ díInvestissement ‡ Capital Variable)
– FCPs (Fonds Communs de Placement)

This list includes certain European funds, which are permitted under European legislation to be
sold in the UK.

Open-ended funds
There are many funds to choose from and some are valued at many millions of pounds. They are called open-ended funds as the number of units (shares) in issue increases as more people invest and decreases as people take their money out.

As an investor, you buy units/shares in the hope that the value rises over time as the prices of the underlying investments increase. The price of the units depends on how the underlying investments perform.

You might also get income from your units through dividends paid by the shares (or income from
the bonds, property or cash) that the fund has invested in. You can either invest a lump sum or
save regularly each month.

Different asset classes
Open-ended investment funds generally invest in one or more of the four asset classes ñ shares, bonds, property and cash. Most invest primarily in shares but a wide range also invest in bonds. Few invest principally in property or cash deposits. Some funds will spread the investment and have, for example, some holdings in shares and some in bonds. This can be useful if you are only taking out one investment and, remembering that asset allocation is the key to successful investment, you want to spread your investment across different asset classes.

The level of risk will depend on the underlying investments and how well diversified the open-ended investment fund is. Some funds might also invest in derivatives, which may make a fund more risky. However, fund managers often buy derivatives to help offset the risk involved in owning assets or in holding assets valued in other currencies.

Trustee or depository protection
Any money in an open-ended investment fund is protected by a trustee or depository, who ensures the management company is acting in the investorsí best interests at all times.

For income, there is a difference in the tax position between funds investing in shares and those investing in bonds, property and cash. Whichever type of open-ended investment fund you have, you can reinvest the income to provide additional capital growth, but the taxation implications are as if you had received the dividend income.

No capital gains tax (CGT) is paid on the gains made on investments held within the fund. But, when you sell, you may have to pay capital gains tax.


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