Unit trusts and OEICs

1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  28  29  30  31  32   

22. Selecting a fund: Defining your objectives

Investment Objectives

The main consideration in choosing a fund is whether you are aiming for capital growth, income, or a balance of growth and income.

1. Capital Growth

   How you go about this depends on your attitude to risk. On the one hand, you can concentrate on growth funds as classified earlier. Most growth funds fall into the higher-risk category (3 to 4 on our scale) and are likely to pay small dividends.

   An alternative strategy for the more risk averse is to select income funds that aim to generate healthier dividends and to reinvest them in more units/shares. This builds up your capital.

   Capital growth can also be enhanced by sheltering funds in ISAs or PEPs.

2. Income

   For the risk averse, corporate bond and gilt funds can generate decent levels of income, although capital growth is likely to be low and the funds are vulnerable to changes in interest rates.

   Some of the high yielding corporate bond funds contain debt instruments of lower quality and, ergo, higher risk.

   Income can be enhanced by sheltering the funds in an ISA or PEP. Peculiarly, corporate bond and gilt income distributions will be unaffected by the taxation of dividends arising out of ISAs and PEPs from 2004.

3. Growth and Income

   Equities and equity-based funds provide a source of growing income which often outperforms fixed deposits over the long term, although it will start out lower.

   Capital growth on Balanced Funds can be used to subsidise income through simultaneous capital withdrawals. Fund management groups often arrange a set of balanced funds to generate a dividend in each month of the year. Simultaneous capital withdrawals can bring the total of income and capital up to a predetermined level. This can work very well over the longer term provided that the rate of capital withdrawal is not too high. Investors can enjoy capital growth and a rising income, which may be only partially taxable because the realised gains on disposal of the units/shares falls within the annual CGT exemption.

   At present, dividend income can be enhanced by sheltering the funds in ISAs and PEPs, but this advantage will be less effective from 6 April 2004 when the tax credit is no longer reclaimable.

1. What is a unit trust? 2. What is a unit? 3. The trust deed and scheme particulars 4. The people behind a unit trust 5. Charging structure of unit trusts 6. Pricing of units - FSA rules on maximum offer price 7. Pricing of units - FSA rules on minimum bid price 8. Pricing of units - in practice 9. Pricing of units - historic and forward pricing 10. OEICs - Open Ended Investment Companies 11. Shares in OEICs 12. OEICs - pricing 13. OEICs - charges 14. Taxation of unit trusts and OEICs - Introduction 15. Tax treatment of dividends from equity funds 16. Tax treatment of coupons from non-equity funds 17. Capital Gains Tax 18. Tax shelters 19. Investment powers of fund managers: 'eligible investments' 20. Diversification 21. Fund classification: risk gradings 22. Selecting a fund: Defining your objectives 23. Selecting a fund: Active vs passive 24. Selecting a fund: lump sum vs regular savings 25. Selecting a fund: Past performance 26. Where to buy unit trusts and OEICs 27. Buy with or without advice? 28. The mechanics of buying 29. The mechanics of selling 30. Share exchanges and fund switches 31. Investor protection 32. Conclusion

• Exchange Traded Funds