# Understanding Open-Ended Investment Companies (OEICs) in the UK

## What Is an Open Ended Investment Company (OEIC)?

Open-ended investment companies (OEICs) are UK-based funds that pool investor money to create diversified portfolios of stocks and securities. They offer flexibility by continuously creating new shares to meet investor demand and are regulated by the Financial Conduct Authority.

OEIC shares do not trade on the [London Stock Exchange](https://www.investopedia.com/terms/l/lse.asp).

The price of the shares is based largely on the underlying assets of the fund. These funds can mix different types of investment strategies such as income and growth, [small cap](https://www.investopedia.com/terms/s/small-cap.asp) and [large cap,](https://www.investopedia.com/terms/l/large-cap.asp) and can constantly adjust their investment criteria and fund size.

OEICs are called "open-ended" because they can create new shares to meet investor demand. Also, the fund will cancel the shares of investors who exit the fund. OEICs are regulated by the Financial Conduct Authority (FCA), which means services such as the Financial Ombudsman are available to investors if problems arise.

### Key Takeaways

*   An open-ended investment company (OEIC) allows for new shares to be created or canceled based on investor demand, making it highly flexible.
*   OEICs offer diversification by investing in a wide range of securities, which can reduce the risk to investors' principal.
*   Governed by the Financial Conduct Authority, OEICs assure investor protection through regulations and access to the Financial Ombudsman.
*   OEICs charge an annual management fee and may also include initial purchase charges, but often lack exit fees.
*   Compared to unit trusts, OEICs generally feature a simpler pricing structure with a single price based on net asset value.

## How Open-Ended Investment Companies (OEICs) Work

An open-ended investment company pools investors’ money and spreads it across a wide range of investments, such as equities or [fixed-interest securities](https://www.investopedia.com/terms/f/fixed-interest-security.asp). This diversification helps reduce the risk of losing an investor’s principal. OEIC funds offer the potential for growth or income. They usually function as a medium to long-term investment, held for five to ten years or longer.

Any U.K. investor, 18 years or older, may invest in a wide range of funds managed by industry experts. As in the United States, there are various levels of risk available for capital growth, income generation, or a combination of both. Shareholders may invest for themselves or their children. When children turn 18 years old, they hold the investment in their own right.

## Fees and Costs Associated with OEIC Shares

As of 2021, investors paid an initial charge ranging from 0% to 5% when buying new shares. This type of front-end load lowers the amount of money going into the fund to purchase shares. Investors also incurred an annual management charge (AMC) of about 1% to 1.5% of their share value. The AMC covers the fund manager's services. Funds that are not actively managed, such as index trackers, have much lower fees.

Most funds quote a [total expense ratio](https://www.investopedia.com/terms/t/ter.asp) (TER) or an ongoing charges figure (OCF). Each charge includes the AMC and other expenses used for comparing different products. The TER and OCF do not include dealer charges that can add significantly to annual costs if the fund has a high turnover rate.

Selling shares may involve an exit charge, which is a percentage of the total sale value. However, many OEICs do not charge exit fees.

## How to Invest in Open-Ended Investment Companies

OEICs are ideal for investors lacking the time, interest, or expertise to manage their investments actively. Investors may invest a single payment or monthly payments with minimum amounts depending on the fund. Also, access to funds online or over the phone is generally easy. Further, shareholders may pay a fee when moving between funds.

Pros

*   Offer professional money management
    
*   Have diversified portfolios, mitigating risk
    
*   Are highly liquid
    
*   Feature low investment minimums
    

Cons

*   Carry high annual fees, sales charges
    
*   Incur taxes
    
*   Must maintain cash reserves, restricting returns
    
*   Require mid-to-long-term investment horizon
    

OEICs are not tax-advantaged; interest and dividends are taxable, and selling shares may trigger a capital gains tax. Of course, the amounts involved must exceed dividend and capital gains tax allowances. Also, shareholders may hold OEICs tax-free in an [Individual Savings Account](https://www.investopedia.com/terms/p/pep.asp) (ISA) or other U.K. pension plan.

However, investment values and resulting income are not guaranteed and may increase or decrease, depending on investment performance and currency exchange rates for funds investing in foreign markets. Therefore, a shareholder may not get back the original amount invested.

U.S. residents may not hold shares in OEICs. U.S. shareholders must have the OEIC sell their shares or transfer their investments to U.K. residents.

## Comparing OEICs With Unit Trusts: Key Differences

In the UK, [unit trusts](https://www.investopedia.com/terms/u/unittrust.asp) and OEICs are the most common investment funds and share many similarities.

Like OEICs, unit trusts consist of a manager who buys stocks and bonds for holders of a fund, in an open-ended format. The two mainly differ in the way they are priced. Unit trusts will have two prices:

1.  The bid price—the price per unit received for each unit sold back to the fund
2.  The offer price—the price to purchase each unit of the fund

OEICs have only one price per day, based on the [net asset value](https://www.investopedia.com/terms/n/nav.asp) (NAV) of the underlying assets of the fund. OIECs tend to have lower fees than UTs because they have a simpler structure. Many investment companies have been converting unit trusts into OEICs for this reason.

## Real-World Example of OEICs

British OEICs are comparable to American mutual funds, and many U.S. investment companies that do business in the U.K. offer them. One such is Fidelity International, an overseas division of Fidelity Investments. In July 2018, the division announced it was instituting variable management fees for five UK-domiciled OEICs, including the Fidelity Special Situations, Fidelity European, Fidelity Asian Dividend, Fidelity Global Special Situations, and Fidelity American funds.

This change reduced the base AMC of the funds by 10%.

## The Bottom Line

Open-ended investment companies (OEICs) provide a flexible investment option for individuals in the U.K. who want professional management and diversification across various asset classes. With the ability to adjust the fund size and investment criteria, these funds meet different investor needs, whether for growth or income. While they offer the advantages of liquidity and a range of risk levels, investors should consider the fees, potential tax implications, and the long-term horizon typically required for such investments. It is crucial for investors to understand OEICs' structures and costs and to ensure they align with individual investment goals and risk tolerance.

**_Correction-Oct. 13, 2022:_** This article previously misstated that shares of OEICs trade on the London Stock Exchange.

> **Article Sources**
>
> 1.  Money. "[What Are OEICs](https://www.money.co.uk/guides/what-are-oeics)."
>     
> 2.  Gov.UK. "[Individual Savings Accounts](https://www.gov.uk/individual-savings-accounts/print)."
>     
> 3.  Gov.UK. "[CG41562—Open-Ended Investment Companies (OEICs): S12006/964](https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg41562)."
>     
> 4.  The Chartered Institute for Securities & Investment. "[CISI—Financial Products, Markets & Services](https://www.cisi.org/cisiweb2/docs/default-source/cisi-website/education/student-portal/fpms/7-investment-funds/2-unit-trusts-and-oeics.pptx?sfvrsn=2)," Pages 6 and 13.
>     
> 5.  FT Adviser. "[Fidelity Introduces Variable Management Fee on OEICs](https://www.ftadviser.com/investments/2018/07/30/fidelity-introduces-variable-management-fee-on-oeics/)."