What is an Open Ended Investment Trust?

OEIC’s and Unit Trusts are ‘Open Ended’, which means that if you buy a unit of a fund, the fund manager receives some cash which they then invest for you. Similarly, if you sell a unit of a fund the fund manager needs to return your cash to you, which, if they don’t have the cash to hand may involve them selling some underlying assets. Obviously, this is a bit of a simplification. In reality fund managers keep a portion of the fund in cash so they can pay out any funds without having to sell assets too often.

This is unlike buying a share where you are buying something that already exists from another person. The total number of shares in existence doesn’t change, and price is set by what other people think the value of the share is, and not necessarily what the value of the underlying assets are.

To give you an analogy, stocks and shares are like a classic car that isn’t made anymore. The value of the car may go up or down based on whether it is popular or not, but they will never make any more cars. If you want to buy a car you have to find someone who is selling that type of car, and if you want to sell one you have to find someone who wants to buy it. An OEIC on the other hand, is like a car that is still being made, that the car company will buy back at any time. If you want a car, you go to the car company and they make you a new one. If you are done with the car, you take it back to the car company and they buy it back. The car company take the risk that everybody wants to return the car at once and they’re left with loads of cars (but they could break them down and sell the parts on)!!

(AAG)