An Open Ended Investment Company is primarily seen in the United Kingdom. The functioning of an OEIC is very similar to a mutual fund in India. Just like a mutual fund, an OEIC collects money from several investors across the country and then pools the money together in a fund. Every OEIC would have determined its investment strategy – which could be to make short-term wealth or long-term wealth for its investors. Those who align with these objectives put their money into the fund to earn high returns.
Introduction: OEIC definition
An OEIC is an investment fund that operates in the United Kingdom. The shares of these funds are listed on the London Stock Exchange – allowing the public to trade in them. An Open Ended Investment Company’sdefinition includes the ability to change the investment strategy, methodology and composition. Like any other fund, an OEIC has a defined strategy in place. The fund’s investments can happen based on the size of the stock or the kind of returns they generate. Some invest in small-cap, mid-cap and large-cap – all three, to diversify and reap the benefits of all kinds of investments. However, an Open-Ended Investment Company can change its tactics and the fund mix accordingly, whenever it desires.
The basics of an OEIC
An OEIC investment is an excellent investing tool. The most significant advantage is that an individual does not have to invest a hefty chunk in owning a part of an OEIC. The fundamental framework is that small amounts of money are collected from a vast audience, making it possible for individual investors to invest a small sum of money. And there is no compromise on the benefits – individual investors can enjoy the services of professional fund managers who decide on the fund’s composition in the investors’ best interests. Even with minuscule investments, investors can diversify their risk across different investment products – equity, government securities, debt, fixed-income securities, or even real estate and other new day investment avenues that keep getting introduced.
What’s with the term ‘Open-Ended’?
The OEIC meaning is quite similar to a collective investment scheme. Now, an open-ended scheme is where the fund’s capital keeps fluctuating. How can the capital keep fluctuating? Let’s understand.
Suppose a couple of investors want to invest in an Open-Ended Investment Company. To issue units to the interested investors, the OEIC will first issue new shares in the market, and these shares will then be allocated to the investors willing to invest money in the fund. This way, the capital of the fund will increase.
On the contrary, investors can want to redeem their holdings and realise their investments. To repay the amount to the investors, the fund will cancel the shares it had in issue. When this is done, the capital of the fund reduces.
So, the control over the quantum of capital is not in the hands of the fund but the investors. And the fluctuation of capital can happen at any time during the fund’s duration, at the investors’ discretion.
How to go about an OEIC investment?
Since Open Ended Investment Companies are based out of the U.K., investing in them is open to all the United Kingdom residents aged 18 years or more. If you are a resident of the U.K., investing in these instruments is pretty straightforward. So what about the others? For non-U.K. residents, it could be a bit difficult. Some funds accept overseas applications, but then again, investors’ rights could be subject to certain restrictions. Non-U.K. residents would be required to submit additional identity proof to second their investments.
As mentioned earlier, only adults are permitted to invest in Open-Ended Investment Companies. Interestingly, adults can invest on behalf of their children as well. The investments, along with all the accumulated returns, can be transferred to the child on attaining adulthood. Using this methodology, a parent can plan for her child’s future and financially protect the life ahead.
The OEIC, i.e. Open-Ended Investment Company Regulations, 2001, in the United Kingdom govern these investment funds. The journey of its launch began in the 1990s when the U.K. Government wanted an instrument that could issue shares based on their demand. Currently, the most popular investment funds in the U.K. are OEICs and Unit Trusts.
While Unit Trusts have two different prices – a bid price and an offer price, OEICs have one per day. The price is calculated based on the NAV – Net Asset Value of the fund. The NAV is the market value of the net assets managed by the fund. Since OEICs have a simple structure, they are preferred over traditional Unit Trusts. So much so that several unit trusts are being converted to OEICs – to reduce the investment costs of investors and provide them with better management services.
Cost of investing in an OEIC
There are two kinds of funds – actively managed and passively managed. The fund management expenses of active funds are generally higher than passive funds. On average, the Annual Management/ Maintenance Charges required to be borne by an investor are 1-1.5% of her shares’ value. In addition to this, an entry-load reduces the number of shares an investor ultimately gets. Usually, OEICs do not charge an exit load while redeeming the units, but that solely depends on the company.
The OEIC discloses all the charges to the public. Hence, as an investor, you must understand all the fund running expenses beforehand. It would help if you calculated your expected returns after considering the expenses mentioned by the fund. This calculation will help you track the performance of the fund and make investment decisions. You will then easily be able to buy or sell the units at the right time.
You must know of the Government regulations before investing in any instrument. These collective investment schemes are regulated by the FCA – The Financial Conduct Authority. The FCA requires these funds to be very well diversified, meaning that not more than 10% would be invested in any company. Hence, investors get an outstanding opportunity to diversify, reduce risks and earn consistent returns.