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Unit Trusts and OEICs (Open Ended Investment Company) are pooled funds of investors' money, which are used to buy a range of shares, gilts, bonds or cash deposits. Both Unit Trusts and OEICs are open ended funds meaning that the size of each fund can vary according to supply and demand. Unit Trusts and OEICs provide a mechanism of investing in a broad selection of shares, thus reducing the risks of investing in individual shares. Typically, a Unit Trust or OEIC is worth anything from £5m to £300m. There are thousands of Unit Trusts and hundreds of OEICs to choose from, so it is important to select the right fund to meet your needs. When you invest in a Unit Trust you buy a unit, which means a portion of the total fund, OEICs issue shares. Each Unit Trust and OEIC has its own investment objective and the fund manager has to invest to achieve this objective. The fund manager will invest the money on behalf of the unit holders (or shareholders). The value of your investment will vary according to the total value of the fund, which is determined by the investments the fund manager makes with the fund's money. To cover the costs of running a fund you will usually have to pay an initial charge when units or shares are purchased, and an annual fee for ongoing costs such as administration. Some fees are declared as a percentage of your investment, others are built into the price. You can invest into a Unit Trust or OEIC through an ISA (Individual Savings Account). Usually, there are no additional charges for having an ISA, and you have the advantage of the investment being tax-free.
Short term investments
If you are thinking about investing in the short term, for a period of 1 to 3 years, then Money Market or Cash funds are likely to be your best option. Money Market Unit Trusts and OEICs are very similar to bank or building society accounts. They are designed to provide a good level of income and are considered a lower risk investment.
Medium term investments
Medium term can be defined as an investment held for 3-7 years. The Investment Management Association (IMA, formerly AUTIF) consider Bond funds the best option for medium term investors who are also seeking a good level of income and some growth. Bonds are investments that pay a fixed rate of interest and are issued by governments or companies to raise money. The price of a bond also tends to move up and down less than a share, placing Bond funds in the low to medium risk bracket. You can invest in UK Bond funds, International Bond funds and Equity & Bond funds. The Equity & Bond fund combines the relatively secure income generated from a bond with the higher rate of income, but more risky investment, from company shares.
Long term investments
There are many funds or combinations of funds available to those looking to invest for 7 years or more; whether you are looking for growth of capital, a growing income, or a combination of both. Over the long term equity investments are more likely to give you a better rate of return; risk also tends to diminish. Examples of funds that provide income and/or growth are UK Equity Income, UK Equity Growth and Income, International Equity Income and International Equity and Bond.
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