THE PRUDENT INVESTOR: My jargon-busting guide to help you know your Oeics from your elbow! 

There’s more to choosing an investment fund than deciding on a manager, your favoured spot in the world and the level of risk.

One choice that is not often highlighted is the type of fund. Fund types include unit trusts, open-ended investment companies (Oeics), investment trusts and exchange-traded funds.

All types of fund give investors access to a potpourri of shares, bonds or other investments, but they achieve it in different ways. This can affect charges, risk and accessibility to your money.

A number of you have asked for a broader explanation.

Let’s start with unit trusts and Oeics, which are similar creatures and the most popular form of pooled investments.

Figures published by the Investment Association — the trade body for fund managers — show that we held a combined £1.17 trillion in these in January.

With that sort of money, you’d think they’d have invested in state-of-the-art technology to make investing a sleek, swift and simple experience.

But both unit trusts and Oeics use a 20th-century method known as forward pricing.

They value their assets just once a day, at midday. So, if you were to buy or sell a fund today, the trade wouldn’t actually take place until midday tomorrow.

As we’ve seen over the past couple of weeks, the market can move 2 per cent or more in a day.

So we’re forced to take a leap into the unknown when we want to buy or sell our investment — effectively turning the trade into a lottery.

The Investment Association tells me that valuing these funds can take up to two hours and to do it more than once a day would involve more administration and cost more. 

I suppose this may be the case if you prefer to count on your fingers and toes, rather than investing in modern technology.

There’s another point to understand about unit trusts and Oeics. They can take in more money by issuing more units to new investors.

The fund manager will then use the money to buy more shares, but these may not be their favourites.

The bigger the fund, the more likely it is that the manager will sway from their core objectives.

These funds can also cancel units when investors sell, but this may mean selling shares to raise the money, though the trust will have some cash reserves. 

In the worst case, a manager could be forced to sell shares they would rather keep — which could have an impact on performance.

The major difference between these two types of fund is that Oeics have one buying and selling price and are governed by company law, whereas unit trusts have a higher price when you buy and a lower one when you sell (known as a bid-offer spread) and are governed by trust law.

So, what about the alternatives? The first investment trust was launched in 1868. They tend to be more transparent, often have lower charges and can be cheaper to hold with fund supermarkets.

Investment trusts are basically companies that own shares in other companies. They are traded on the stock market, so, if you want to buy or sell, you can do so instantly, knowing the exact value.

The number of shares in issue remains constant. The share price will fluctuate with demand and usually does not directly reflect the value of the assets it holds.

When a trust is popular, the price could increase to more than the value of the assets — known as trading at a premium.

It can also fall to less than the value of the assets — known as a discount.

Big discounts might occur because professional investors don’t like the look of the shares a trust is holding, or they may not be happy with the management style.

Woodford Patient Capital is an interesting example. At launch, investors flocked to buy into the Neil Woodford phenomenon, pushing the price to a premium of more than 10 per cent.

A couple of weeks ago, it was trading at a discount of more than 16 per cent. Shares cost around 77 p, but the value of investments was around 92p per share.

Even given Woodford’s current unpopularity, this looked cheap.

I bought some and have seen the price rise to more than 83p for a gain of more than 7 per cent.

This is a long-term buy, but an early bonus is always welcome.

Investment trusts can also borrow to invest, which can boost returns if the manager makes good investment decisions, but, equally, can exacerbate losses if they don’t.

Finally — and briefly — we come to exchange-traded funds, which generally allow you to track a stock market index, such as the FTSE 100, or the price of a commodity, such as gold or silver. Their fees are low and you can buy and sell knowing the price.

But, in some cases, you may not be buying the physical shares or commodity, and instead may be investing in a stock market instrument known as a derivative. This increases the risk, so make sure that you know what you are getting.

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