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Open Ended Investment Company (OEIC)



Definition

An Open Ended Investment Company (OEIC) is a type of investment fund incorporated under the company law in the UK. Unlike regular companies, it invests the shareholders’ money in a diversified portfolio of financial securities such as shares, bonds, and assets. The value of an OEIC is directly linked to the performance of its underlying investments, so its shares can increase or decrease in value.

Phonetic

Open Ended Investment Company (OEIC) is pronounced as: “oh-pen en-ded in-vest-ment com-pany” or in phonetic alphabet: /ˈoʊpən ˈɛndɪd ɪnˈvɛstmənt ˈkʌmpəni/. OEIC is pronounced as “oh-eek” , or in phonetic alphabet: /oʊ-‘i:k/.

Key Takeaways

Main Takeaways about Open Ended Investment Company (OEIC):

  1. Flexible Investment: OEIC operates by pooling funds from various investors to create a diversified and managed portfolio. This model allows investors to benefit from a broader range of assets than they could usually achieve on their own.
  2. Managed by a Professional Fund Manager: OEICs are actively managed by professional fund managers who make informed decisions about where to invest the pooled money. This management expertise can potentially lead to higher returns than individual investing.
  3. Liquidity: OEICs are open-ended, meaning new shares can be created and existing shares can be cancelled in response to demand from investors. This implies they have a significant liquidity advantage as investors can typically buy or sell shares on any business day.

Importance

The Open Ended Investment Company (OEIC) is crucial in the financial and business sector primarily due to its flexible and investor-friendly structure. As an open-ended fund, it allows for the continuous issue and cancellation of shares directly with the fund, based on investor demand, implying that the size of the fund can fluctuate in line with investment levels. This offers investors the chance to buy shares at any time at a price directly linked to the fund’s underlying assets or net asset value (NAV). OEICs also allow diversity in portfolio management since they can invest in a diverse range of asset types and geographical areas. Therefore, their importance lies in the liquidity, flexibility, and diversification they offer to investors.

Explanation

The primary purpose of an Open Ended Investment Company (OEIC) is to facilitate investing and managing a diversified pool of assets for investors. It’s a type of collective investment vehicle that pools funds from multiple investors, and invests the aggregated funds into a broad range of financial securities such as stocks, bonds, or commodities, thereby providing diversification which might be difficult for an individual investor to achieve. Partly due to this pooled mechanism, OEICs allow for efficient risk spreading. OEICs operates on an ‘open-ended’ structure, which is key to its dynamism and flexibility. The fund can continually issue shares or cancel them based on demand, the pool of investments isn’t fixed but expands or contracts according to investors buy (subscriptions) or sell (redemptions) their shares in the fund. This makes it an option highly adaptable to the market’s and investors’ evolving needs and preferences. Furthermore, the use of professional fund managers in OEICs allows investors to benefit from specialist knowledge and expertise, potentially enabling higher returns than they would gain on their own.

Examples

1. Vanguard Investments: Vanguard is a well-known investment company that offers several open-ended investment funds. These funds allow for the continuous issuing and re-purchasing of shares based on daily net asset value. Examples of Vanguard OEICs include Vanguard S&P 500 UCITS ETF, and Vanguard FTSE All-World UCITS ETF.2. BlackRock: BlackRock is another global investment company providing a portfolio of open-ended investment companies. Examples are iShares Core MSCI World UCITS ETF and iShares Global Clean Energy UCITS ETF. These funds have flexibility to frequently issue and cancel units, facilitating investors to enter or exit the investment easily.3. Fidelity International: Fidelity provides various OEICs that invest across different geographies and sectors. Examples include Fidelity Global Technology Fund and Fidelity European Fund. The share value of the funds depends on the value of underlying investments and number of shares in issue.

Frequently Asked Questions(FAQ)

What is an Open Ended Investment Company (OEIC)?

An Open Ended Investment Company (OEIC) is a type of investment fund domiciled in the United Kingdom that is structured to invest in shares, bonds, cash, or other securities. It has a variable capital structure, meaning that it can issue and cancel shares according to demand from investors.

How does an OEIC work?

An OEIC works by pooling investors’ money together and investing it in a diversified portfolio of assets managed by professional fund managers. Investors buy shares in the company, with the price of the shares determined by the net asset value of the company’s investments.

What are the benefits of investing in an OEIC?

Beneficial aspects of investing in an OEIC include professional management of your money, the ability to diversify your investments more than you might be able to individually, and the ability to easily buy and sell shares due to the fund’s variable capital structure.

What are the potential risks of investing in an OEIC?

As with any investment, there’s a risk that you may not get back the amount you invested. The value of your investment can go down as well as up. Your returns are also directly linked to the performance of the underlying investments, and you may lose money if the assets that your fund invests in perform poorly.

How do I invest in an OEIC?

You can invest in an OEIC through a broker, adviser, or directly with the investment company. It’s important to research the company’s strategy, fees, and past performance before deciding to invest.

How does an OEIC differ to a Unit Trust?

An OEIC is structured as a company and its investors are shareholders, whereas in a Unit Trust, the fund is divided into units, each of which represents a portion of the portfolio, and investors are unit holders.

What fees can I expect when investing in an OEIC?

Fees can vary, but may include initial charges for buying shares, annual management charges, and exit charges for selling shares. Be sure to understand all fees and costs before investing.

Related Finance Terms

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