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At
our recent women's
seminar, one of
the attendees (hi
Sheena!) asked for
some information
on the pros and
cons of the various
investment funds.
So here we go.
There
are three main types
of investment fund.
The most widely
held are unit trusts,
although many of
these are now being
converted into open-ended
investment companies
(or OEICs, pronounced
oik as in 'you horrible
little oik'). The
next most prevalent
type of fund is
the investment trustif
(IF). Finally, the
most recent addition
is the exchange
traded fund (ETF).
For
the most part, these
funds operate in
a similar fashion.
You invest your
money, which the
fund manager uses
to buy and sell
the investments
of his or her choice.
The price of the
fund goes up or
down depending on
how well the investments
perform. However,
there are subtle
differences, as
summarised in the
table below.
| |
|
UT/OEIC |
IT |
ETF |
| Initial
charges |
|
Yes |
No |
No |
| Stamp
duty |
|
Yes |
Yes |
No |
| Trades
at net asset
value |
|
Yes |
No |
Yes |
| Gearing |
|
No |
Yes |
No |
| Bid/offer
spread |
|
Yes/No |
Yes |
Yes |
Initial
charges
Initial
charges for unit
trusts are often
5% if you buy direct
from the fund management
company. However,
you can pay less
if you buy through
a fund supermarket
or discount broker.
Although
there are no initial
charges for investments
trusts or ETFs,
as these are essentially
shares bought through
a broker, you will
have to pay commission
when you buy and
sell. A typical
online broker will
charge £10-£15 per
trade, although
Comdirect do offer
a scheme called
iPlan which makes
no charge for ETF
purchases. Most
investment trusts
offer savings schemes,
typically charging
1% for investing
regular monthly
amounts.
Stamp
duty
One
advantage of ETFs
is that you don't
have to pay stamp
duty when you buy
them, because the
funds are domiciled
in Ireland. Stamp
duty is charged
at 0.5% (for purchases
only) when you buy
unit or investment
trusts. However,
the flip side of
this is that because
ETFs are not based
in this country,
there is no tax
credit on their
dividends. This
means, if you hold
them outside of
an ISA or a PEP,
you'll have additional
tax to pay as compared
to a unit or investment
trust.
Trading
at net asset value
/ Gearing
The
price of a fund
is determined by
the value of its
underlying investments,
also known as its
net asset value.
However, there is
an additional complication
in the case of investment
trusts. Their price
is also determined
by the supply and
demand in the market
for their own shares.
Often, the resulting
price will be less
than the net asset
value, meaning that
the shares trade
at a discount. Occasionally,
a fashionable fund
will see its shares
trading at a premium.
This, together with
the fact that investment
trusts are allowed
to borrow money
to invest additional
amounts, mean that
prices for investment
trusts tend to be
more volatile than
those of unit trusts
and ETFs.
Bid/offer
spread
With
the exception of
OEICs, all funds
have different prices
at which you can
buy and sell. Naturally,
the price you buy
at will be slightly
higher than the
price at which you
can sell.
Which
is best?
Each
type of fund has
its pros and cons
so which type of
fund is best for
you depends on how
you tend to invest.
Charges tend to
lower for investment
trusts and ETFs,
so long-term investors
are likely to favour
them over unit trusts.
The additional volatility
risk of investment
trusts may put off
more cautious types.
Unit trusts offer
a greater choice
of funds and are
sometimes better
if you wish to invest
smaller amounts
on a regular basis.
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